Copper the Star of the Show for Xstrata in 2010

Xstrata's strong full-year results were fuelled by commodity prices, in particular that of copper, and 2011 is shaping up to be better still

Daniel Rohr, CFA 9 February, 2011 | 11:33AM
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Strong commodity prices drove strong full-year results at Xstrata (XTA), which turned in a 34% top-line expansion, to $30.5 billion, accompanied by 53% EBITDA (earnings before interest, taxes, depreciation, and amortisation) growth to $10.4 billion, before one-time items.

Based on prevailing commodity prices, 2011 is shaping up to be better still, as CFO Trevor Reid indicated in his prepared remarks that Xstrata had booked $1.4 billion in EBITDA in December 2010 alone, which works out to an annualised $16.8 billion run rate. On a cautionary note, however, Reid also remarked that cost inflation, which had thus far paled in comparison to what the mining industry endured in the first half of 2008, was starting to build in earnest, as massive capital projects initiated by major mining companies has increased demand for skills, equipment, and key inputs.

While performance was solid across most business units (lower unit costs at Xstrata's nickel and zinc operations were notable), copper was clearly the star of the show in 2010, accounting for half of the $3.6 billion increase in EBITDA. Given the heady price of copper today ($4.59/lb on COMEX versus an average $3.42/lb in 2010) and the prevailing tight supply situation, we expect even stronger results from the copper business in 2011. For its part, Xstrata, like many large copper producers, is positioning its portfolio for a "tight supply" scenario over the next several years, aiming to grow output over 50% by the end of 2014 (mine production was 913 thousand tons in 2010). The growth effort is headed by a trio of big Peruvian projects: Antamina by late-2011 (adding 115 thousand metric tons per annum--or ktpa), Antapaccay by 2012 (+160 ktpa), and Las Bambas by 2014 (+400 ktpa).

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