Xstrata Focuses on Organic Growth Post Strong 1H

Improved balance sheet on the back of higher commodity prices is unlikely to refuel Xstrata’s traditional appetite for acquisitions

Daniel Rohr, CFA 4 August, 2010 | 12:52PM
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Significantly higher commodity prices made for a strong first half at Xstrata, which turned in a 43% top-line expansion to $13.6 billion accompanied by EBITDA growth of 67% to $4.5 billion. Looking ahead, Xstrata noted that the current outlook remains "mixed," pointing to a "three-speed" global economy led by the emerging markets of China, Brazil, and India, followed by what appears to be a steady recovery in the U.S., and Europe bringing up the rear. Of course, as far as the near-term outlook for metals and coal prices are concerned, no market is more important than China. On this topic, management observed that the economy is "clearly slowing" but nonetheless expressed confidence that the Middle Kingdom is headed for a "soft landing."

Not surprisingly, Xstrata's balance sheet--a source of concern in the throes of the global financial crisis--exhibited marked improvement year-to-date. Net debt declined to $8.4 billion from $12.6 billion at year-end 2009, buoyed by free cash flow ($1.58 billion) and Glencore's exercise of its Prodeco call option ($2.25 billion plus the balance of Xstrata investments and accrued profits). Net debt/net debt plus equity dropped to 19%, below the 26% at year-end 2009, a level management had previously remarked was "in line with...long-term targets."

This of course, begs the question: if management views its balance sheet as underleveraged, what might it do with the dry powder? The company continues to be the subject of rampant speculation concerning its next big move on the M&A front, not surprising given the current management team's historically ample appetite for acquisitions. Despite nonstop market speculation ranging from a combination with commodities trader and 34% Xstrata owner Glencore (more on this below), the purchase of the 75% of platinum producer Lonmin that it doesn't already own, or even a renewed approach at reluctant partner Anglo American, Xstrata seems, for the moment, comfortable with tending its own garden--a marked contrast from the past several years. (Read Morningstar's full analysis of Xtrata here.)

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Anglo American PLC2,812.50 GBP0.00Rating

About Author

Daniel Rohr, CFA  is a senior equity analyst at Morningstar.