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Xstrata’s First-Half Profit Falls on Weaker Metal Prices

Xstrata Plc, target of a $28 billion takeover bid by Glencore International Plc, said first-half profit dropped 33 percent after commodity prices declined.

Net income fell to $1.94 billion from $2.92 billion a year earlier, the Zug, Switzerland-based company said today in a statement. That beat the $1.49 billion average estimate of five analysts surveyed by Bloomberg. Sales at the world’s largest thermal-coal exporter slipped 7 percent to $15.6 billion.

“Our financial performance in the first half of the year reflected a cyclical downturn in commodity prices and the transition to our next generation of lower-cost mines,” Chief Executive Officer Mick Davis said in the statement. “Commodity prices fell significantly, in particular for nickel and zinc, compared to the same period last year.”

Nickel prices sank 28 percent to average $18,438 a metric ton, zinc fell 15 percent to $1,978 and copper slid 14 percent, Xstrata said. The average price for power-station coal at Australia’s Newcastle port, an Asian benchmark, dropped 17 percent to $103 a ton in the first half, according to McCloskey Group data.

Xstrata was shielded in part by higher-priced annual contracts with customers, it said today. Coal sales rose 14 percent to $4.77 billion, while operating profit for this business advanced 1.8 percent to $1.11 billion.

Increased Tonnages

“A strong coal performance was driven by increased tonnages from Mangoola and Rolleston enhancing unit costs,” Liberum Capital Ltd. said in a note. “Overall coal unit costs look to have fallen about 6.5 percent year-on-year.”

Xstrata rose 1.6 percent to 896.9 pence at the close in London. Glencore advanced 2.4 percent to 336.6 pence. The FTSE 350 Mining Index added 1.9 percent.

Inflation in the industry pushed up costs by $386 million compared with the year-earlier period, the company said.

“The inflation rate has decreased from the record levels seen in recent years and is expected to moderate further in the medium term as a result of mining companies delaying and canceling investment decisions,” the company said.

Xstrata plans to raise total output 50 percent through 2014 to benefit from growing Asian demand for coal and metals. Antapaccay, its copper project in Peru, will begin production of the metal in October, the company said. It also approved the expansion of the McArthur River Mine’s zinc operations, more than doubling output to 5.5 million tons a year.

Dividend Growth

“The bulk of the cashflow will go to the capex program to deliver the 50 percent growth and a substantial portion of that will also go to the payment of dividends,” Davis said in a phone interview. “We are quite mindful of the need for our shareholders to see some cash in their pockets as well.”

Xstrata increased its interim dividend by 8 percent to 14 cents a share. Net debt climbed by 40 percent to $11.36 billion at the end of the first half.

Production of thermal coal climbed to 37.9 million tons in the first half from 32.4 million tons a year earlier. Output of copper cathode, the finished form of the metal, increased to 321,568 tons, while mined copper volumes declined 18 percent to 354,612 tons.

After cutting unit costs in real terms by a net $105 million in the first half, Xstrata plans to increase cost savings for the year as a whole to $390 million.

Cut Investment

Xstrata lowered investment plans for 2012 by $1 billion to $7.2 billion. It will defer $400 million of spending to next year’s budget and the remaining $600 million to a later date, without affecting the commissioning schedule of any approved projects.

The company recorded an impairment charge of $514 million in connection with the valuation of its 25 percent stake in platinum producer Lonmin Plc. Xstrata incurred costs of $21 million in the first half related to the proposed combination with Glencore.

Xstrata and 34 percent shareholder Glencore have set Sept. 7 for a shareholder vote seeking backing for their all-stock merger. The combination would create the fourth-largest mining company by adding Xstrata’s copper, coal and zinc operations to Baar, Switzerland-based Glencore’s trading and mining network.

‘Great Position’

“Xstrata is in a great position to be a huge contributor to the merged entity,” Davis said. “If for whatever reason the merger doesn’t go through, it is well set to deliver value for the shareholders based on its current trajectory.”

Glencore, which bid 2.8 of its shares for each one in Xstrata, is under pressure from Xstrata investors, including 11-percent shareholder Qatar Holding LLC, to raise its offer.

Standard Life Plc and Schroders Plc also called for the initial bid to be sweetened, bringing shareholders opposed to the terms to more than 14 percent. A rejection of the bid by 16.48 percent is enough to block the deal because U.K. takeover rules prevent Glencore using its stake in Xstrata to vote on the transaction.

“Before these results we thought perhaps Glencore had a stronger case to make at keeping up the merger ratio at 2.8 times,” Jeff Largey, a mining analyst at Macquarie Group Ltd. in London, said in an interview with with Guy Johnson on Bloomberg Television. “Post these results I think the argument must have swung a little bit in favour of the Qataris.”

Xstrata’s board has recommended shareholders approve the offer, the largest deal announced so far this year, according to data compiled by Bloomberg.

“Near term, we think that Xstrata shares will be less driven by earnings and more by the market view on the proposed combination with Glencore,” Jason Fairclough, an analyst at Bank of America Corp., wrote in a note to clients. “We think the rationale for the proposed merger is still compelling.”

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