Xstrata reinstates dividend as outlook improves

Xstrata reinstated its dividend on improved confidence over commodity prices, but said that 2009 profits had been hit by the global slowdown and weaker dollar.

Cherry Reynard | 08-02-10 | E-mail Article

The Anglo-Swiss mining group reported a fall in revenues of 15.8% to $23.53bn. The biggest areas of weakness were in alloys, copper and nickel and resulted from the savage de-stocking at the end of 2008 and through 2009. Although commodity prices had recovered by the end of the year, revenues in the second half were hit by the declining dollar.

Operating profit fell 38% from £7,249m to £4,476m. This was propped up by $501m in cost savings during the year (approximately 5% of the cost base).

Investors will be pleased to see the significant fall in overall gearing from 40% to 26%. The 2009 rights issue got rid of $3.7bn of debt, but improved cash flows have also played a part. High debt had constrained investment, but the group is now committed to an 89% increase in capital expenditure in 2010. It reiterated its plans to grow organically rather than through acquisition.

The group announced that it will pay a final dividend of 8c, having cancelled its payouts in 2008. Although this is well below the 2007 payout, it is a reflection of the group’s improved confidence. Chief executive Mick Davies said: “In my opinion, the medium term outlook for commodity demand remains very promising. The secular trend in demand for commodities will continue to be driven by the ongoing urbanisation and industrialisation of high-growth, populous economies.” However, he added that the US consumer remains pivotal to a full recovery in global trade, including China's export industry and its strength was likely to remain unclear.

The market welcomed the announcement and shares were up 3.13% to 979.9p in early trading. After a storming year in 2009, which saw the shares rise 164%, Xstrata has tracked the market downwards in 2010. It peaked at 1,246p at the start of the year. The resumption of the dividend is welcome, as is its confident outlook. Much will depend on the ongoing strength of China, which is currently treading a fine line between high growth and over-expansion.

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