X-Rated Results From Xstrata

Published in Company Comment on 7 August 2012

Do the miner's half-year results upset the proposed mega-merger with Glencore?

Anglo-Swiss miner Xstrata (LSE: XTA) released its interim results this morning. The £27 billion firm, which is the subject of a "merger-of-equals" bid from fellow FTSE 100 (UKX) group Glencore International (LSE: GLEN), reported a slump in profits, but lifted its dividend by 8%.

The results reignited speculation on whether Glencore's bid to merge with Xstrata will go ahead after what has lately been a deafening silence on the subject.

Glencore offered 2.8 shares for each Xstrata share earlier this year, but in a surprise move shortly before shareholders were scheduled to vote on the deal on 11 July, Xstrata's second-largest shareholder, Qatar Holding, demanded Glencore improve its offer to 3.25 shares.

The vote on the deal was put back to 7 September and Glencore and Qatar have been locked in talks ever since. What impact will Xstrata's results have on the negotiations?

X-rated results

Xstrata reported a 7% fall in revenue for the first six months of the year, but a whopping 42% drop in operating profit as falling commodity prices took their toll. The company also announced it had reduced its planned spending for 2012 by $1 billion.

However, the operating profit of $2.45 billion was ahead of analysts' forecasts of around $2.3 billion and, despite the reduction in planned spending, ten major projects will commence commissioning on schedule by the end of 2012.

Xstrata's board is proposing to hike the interim dividend by 8% to 14 cents per share, reflecting "our confidence in the medium-term outlook for our business and prospects and our robust financial position."

Nevertheless, Glencore, whose commodity-trading arm can offset weak metal prices, is expected to report a smaller fall in profits than Xstrata when it releases its results on 21 August.

Deal or no deal?

On the face of it, Xstrata's half-year results, plus expectations for Glencore's imminent interims, and consensus full-year profit figures for the two companies that imply a share ratio of around 2, all combine to strengthen the argument of Glencore's hard-nosed deal-maker Ivan Glasenberg that the offer ratio of 2.8 is enough of a premium.

Meanwhile, Xstrata's results, coming in the trough of a cyclical downturn in commodity prices, will do nothing to dent Qatar's belief that Xstrata's assets are worth more than Glencore's offer and that Xstrata has good long-term prospects as a standalone company. By long term, Qatar means 10 to 20 years.

At present, Xstrata's shares are trading at 902p and Glencore's at 336p, giving a ratio of under 2.7, suggesting the market isn't entirely convinced Glencore will increase its offer and that Qatar, which has the support of several other significant shareholders, just might be prepared to scupper the deal.

With slower economic growth in China and the sovereign-debt crisis in Europe hurting commodity demand, Xstrata isn't the only miner suffering. Fellow FTSE giants BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Anglo American (LSE: AAL) have also recently announced plans to review or lower their capital investment, and the whole sector is currently under a cloud.

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> G A Chester does not own shares in any of the companies mentioned in this article.

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