Xstrata reinstates dividend, upbeat on outlook

Mining group Xstrata reinstated dividends on Monday citing an encouraging outlook for commodities demand in the medium term after posting an expected 41 percent fall in 2009 profit on weaker metals prices.

The head of the acquisitive company also told Reuters he had not discussed a possible merger with its biggest shareholder, commodities trader Glencore, but said such a tie-up could create value Analysts said the decision to start up dividends after suspending them during the downturn to save cash was a surprise and helped push the shares higher.

"The group's decision to reinstate the dividend is evidence of the board's increasing confidence of the business outlook," Liberium Capital said in a note, repeating a "buy" rating.

"We continue to think Xstrata looks cheap at 10.6x 2010 P/E even on a bearish copper price assumption of $2.50/lb in 2010." Xstrata shares gained 5.2 percent to 992 pence by 0921 GMT, outpacing a 3.3 percent increase in the UK mining index. They have shed 21 percent since a peak on Jan. 8.

They were the fourth biggest gainer in the blue chip FTSE 100 index last year, rising 209 percent, and outperformed the UK mining index by 50 percent.

Xstrata, the world's biggest exporter of thermal coal used in power plants, will pay a final dividend of 8 cents per share and there was potential for rising payouts, Chief Financial Officer Trevor Reid told Reuters. "With this large capital commitment coming down the pipe we didn't want to be slaves to an overly high level of dividends so we started it an appropriate level and we'll seek to grow it from here," he said in an interview.

Xstrata said Asia would be the main driver of metals demand as the pace of recovery in rich nations was uncertain. "Robust economic growth and demand for commodities from industrialising nations is likely to continue," Chief Executive Mick Davis said in a statement. "The medium term outlook for commodity demand remains very promising."

GLENCORE TIE UP?

Attributable profit, excluding exceptional items and discontinued operations, fell to $2.77 billion last year from $4.70 billion in 2008 mainly due to weaker metals prices on 16 percent lower revenue of $23.5 billion.

This compared to a consensus profit forecast of $2.76 billion, according to 11 analysts on Thomson Reuters I/B/E/S. Glencore, which owns 35 percent of Xstrata, said in December when it raised $2.2 billion there was potential for a listing and possible combination with another group.

Davis told Reuters he did not know what group Glencore was referring to since there has been no discussions about a possible merger. "Clearly, when one puts together a great trading house and a great mining house, you have the potential for value creation," he said in an interview.

"But there is a wealth of other issues that one would have to think about in looking at that sort of combination. But to start speculating about these type of things when there is nothing on the table doesn't make much sense."

Anglo-Swiss Xstrata has not decided whether to buy the rest of platinum producer Lonmin or sell its 25 percent stake, Davis added. Xstrata said it delivered real cost savings of $501 million, representing a 5 percent fall in the operating cost base.

Xstrata, which last October dropped a merger plan with Anglo American, has said it was shifting its focus to organic growth from major takeovers. Xstrata dropped a "merger of equals" proposal for Anglo that would have created a group with a market value of $96 billion after refusing demands from Anglo shareholders that it pay a premium.

The group said on Monday it had over $8 billion in projects currently under construction and a further 10 projects worth $9 billion were due to be approved in 2010. The mine expansions will cost $14 billion in capital spending over the next three years, including $4.9 billion in 2010.

Xstrata posted mixed production data last week, showing an 11 percent rise in coal output and a five percent fall in mined copper, its two most profitable products. Average coal prices last year fell as much 38 percent, copper slid 26 percent and zinc 11 percent.