Should I Buy Xstrata?


LONDON -- Like a betrothed couple spending their last night apart, mining giants Xstrata and Glencore International have just reported separate full-year results for 2012, presumably for the final time. We wish them the best of luck on their 22 billion-pound union, even if the nuptials have been slightly delayed. Elsewhere, I'm asking the question "Should I Buy Glencore International?" Right here, right now, I'm wondering if I should buy Xstrata.

Xstrata-rated results
These are tough times for miners, thanks to falling commodity prices and mixed messages from China, but Xstrata exceeded the market's (lowered) expectations. Revenue fell 7% in 2012, from $33.9 billion to $31.6 billion, thanks in part to a 25% drop in coking coal prices and 23% drop in the average LME nickel price. Adjusted earnings before interest and tax fell 43% to $4.79 billion, while net debt increased by $6.5 billion to $14.7 billion. Net profits were down 80% to $1.2 billion following a series of writedowns, as Xstrata clears the decks ahead of the Glencore merger. Yet the market was happy. It had expected worse. The share price rose 6%.

Xstrata CEO Mick Davis described 2012 as "transformational," with 10 major projects commissioned, as it pursued its organic growth strategy of boosting its capacity by 50% in copper equivalent terms by the end of 2014. Its expansionary capital expenditure program peaked at $7.6 billion. Challenges including rising labor and operating costs (an industrywide problem), stronger producer currencies against the U.S. dollar, and delayed regulatory clearance for the Glencore merger from China's Ministry of Commerce. Final date for the merger has been pushed back to April 16. If it goes through, as expected, the new company will be the world's largest zinc miner, the third-biggest producer of mined copper, and largest exporter of coal burned by power stations. Combining Xstrata's copper, nickel, coal, and zinc mines with Glencore's commodity trading expertise should bring diversification and cost savings. Who wouldn't want a piece of that?

The joy of Xstrata
Xstrata won't have made many investors rich lately. Its share price is down 50% over the past five years, 22% over two years, and 3% over one year, leaving it on a modest price-to-earnings ratio of around 13 times earnings. Income seekers may be disappointed by its 2.7% yield, but its policy is progressive, with its dividend up 14% on 2011. Xstrata's management is upbeat, anticipating an upturn in emerging markets, and the West avoiding the worst. For me, Xstrata hits the spot.

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