Cerrejon stake opens US to Xstrata
March 2, 2006
London - Xstrata, the world's biggest exporter of coal used by power plants, has agreed to buy a $1.7 billion (R10.5 billion) stake in a Colombian mine to tap rising US demand.
Xstrata said it would buy a third of Cerrejon, the world's largest export open-pit coal mine, from Glencore International, its biggest shareholder. Cerrejon will be jointly owned with BHP Billiton and Anglo American.
It also said it was confident about 2006 as it met forecasts with a 60 percent rise in annual profit to $1.706 billion. Revenue rose 25 percent to $8.05 billion on soaring commodity prices.
The Cerrejon coal operation in northeast Colombia was "ideally positioned to supply the growing US import market", Xstrata said.
It wants to expand its coal output after crude oil and natural gas prices surged to a record in the past several months.
That has spurred utilities to rely more on coal-fired generating capacity. McCloskey Group, a UK-based consultancy, expects US demand for thermal coal imports to jump 21 percent this year.
Michael Rawlinson and David Butler, analysts at JP Morgan Cazenove in London, said in a report yesterday: "The US has emerged as a huge import market for thermal coal, providing very attractive growth potential."
Cerrejon is expanding its annual production capacity to 33 million tons from 26 million tons. The mine sells about one-fifth of its output to the US.
Xstrata said: "Declining production, infrastructure and regulatory constraints facing some domestic US producers offer further opportunities for Cerrejon to grow its share of the fast-growing US import market."
Global coal demand rose 6.3 percent in 2004, almost twice as fast as crude oil or natural gas, according to BP.
Xstrata is among mining companies benefiting from the biggest rally in commodity prices in three decades, as supplies of industrial metals and energy struggle to keep up with demand.
Chief executive Mick Davis said: "While it may be reasonable to expect that prices will, in due course, ease from the exceptional levels of recent months, I have little doubt that they will remain above their long-run averages for a number of years. The outlook for 2006 is very encouraging."
The deal was something of a case of third time lucky. Last June, Xstrata lost out to BHP Billiton in its hostile bid for Australia's WMC Resources.
Then in October, Xstrata was thwarted in its attempt to buy Canadian nickel and copper producer Falconbridge after the world's second-biggest nickel producer, Inco, agreed a deal to buy Falconbridge, in which Xstrata took a 20 percent stake in August.
Xstrata said its purchase of the Falconbridge stake gave it an unrealised after-tax profit of $316 million as of December 31. Xstrata would "continue to assess all of the various options" in deciding what to do with the stake.
It would pay a final dividend of 25c a share, compared with 16c a year earlier.
Second-half sales increased 36 percent to $4.3 billion and profit rose to $909 million, from $679 million a year earlier. Bloomberg derived second-half net profit by subtracting first-half earnings from full-year results.
Earnings were cut by $35 million after the company bought back some commodity hedges it had in place for this year.
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