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Zug-based mining group Xstrata has reported lower earnings for the first half‚ with basic earnings per share of 66 US cents‚ a decline of 34% on the previous period’s $1.00. Excluding exceptional items‚ basic EPS were 23% lower at 75 cents.

CEO Mick Davis attributed the performance to the cyclical downturn in commodity prices and the transition to the group’s next generation of lower cost mines.

Revenue was 7% lower at $15.55 billion‚ while operating profit excluding exceptional items declined 42% to $2.45 billion. Attributable profit was 33% lower at $1.94 billion.

It has proposed a dividend of 14 cents per share – up 8% over the 12011 interim period.

Against the background of lower prices and ongoing cost inflation‚ Xstrata’s operational performance remained robust‚ Davis said. Second quarter volumes rose across the group‚ providing good momentum to achieve its expectations of higher volumes in the second half.

“Despite these headwinds and the challenges of operations reaching the end of their lives‚ our businesses cut unit costs in real terms by a net $105 million in the first six months of the year‚ led by the nickel and zinc business units which together accounted for $87 million of savings‚” he said.

“Just as in the previous cyclical downturn of late 2008 and early 2009‚ we are once again taking pre-emptive action to ensure our business remains competitive and to defend margins. Identified savings will not only offset in full our expectations of non inflation increased unit costs of around $580 million for the full year resulting from the inevitable cost pressures of ageing operations reaching the end of their lives‚ including lower grades‚ but will reduce our operating cost base and improve our competitive position. The resultant expected net real cost saving for the year of around $390 million is a creditable cost performance against the very complex operating environment in 2012‚” Davis said.

He pointed out that 2012 is a landmark year for Xstrata and marks the tipping point of the strategy to transform its portfolio through organic growth that it has pursued for the past five years.

“By the end of the year‚ a total of ten major projects will reach commissioning during 2012 and accelerate our transition from certain legacy‚ end of life operations to new and expanded efficient operations‚” Davis noted. A further eleven projects will commence production in the next two years‚” he said.

“Our business will be transformed in terms of asset quality‚ cost competitiveness and further capital-efficient growth potential. The completion of our current organic growth strategy will be as important in the life of Xstrata as the initial acquisition-led growth of the first five years following our IPO‚” he added.

Davis noted that the group will introduce seven new tier one‚ world class assets into its portfolio and expand another four.

“We will realise significant reductions in real unit costs in every commodity. Average mine lives will be substantially extended‚ our projects will deliver robust returns on our investment throughout the commodity cycle and we will gain another raft of low capital cost‚ brownfield expansion options embedded within the world class assets we have developed.

Following a review of the project pipeline‚ Xstrata has resequenced capital spending and deferred $1 billion of expenditure originally planned for 2012.

Its 2013 budgeted spending will increase by $400 million‚ with $600 million deferred beyond that‚ without affecting the commissioning schedule of any of the group’s approved projects. Consequently‚ it expects capital spending in 2012 to reduce to $7.2 billion‚ $1 billion less than its previous guidance‚ smoothing the profile of capital spending across the next two years.

“We expect the volume growth we are bringing to fruition to be well timed for a cyclical recovery‚” he said.

“Our pro-active response to the cyclical downturn will defend margins and ensure our business emerges in a stronger competitive position to capture the benefits of stronger global economic growth. And in the medium term‚ rising demand for commodities from emerging economies‚ coupled with ongoing industry underperformance from ageing operations‚ increasingly complex operating conditions and deferred capital projects will continue to support commodity prices in excess of historical averages‚” he said. - I-Net Bridge