JOHANNESBURG (miningweekly.com) -The combination of Anglo American and Xstrata would create a new major diversified mining powerhouse, Xstrata CEO Mick Davis said on Monday, in posting a sharp decline - but above-consensus - first-half no-dividend operating earnings before interest, tax, depreciation and amortisation (ebitda) of $2,8-billion.
Mining analyst Liberum Capital said that Xstrata's interim results did not match Anglo's: "Anglo had 3% higher ebitda, 20% higher earnings and lower debt at interim, so it's difficult for Xstrata to make case for a merger of equals based on first-half alone."
But Xstrata CFO Trevor Reid pointed out that substantial debt component in the De Beers business was not consolidated into Anglo's accounts, although Anglo would stand behind that debt.
Liberum Capital observed, further, that Xstrata was positioned to outpace Anglo on full-year earnings, owing to its exposure to base metals, and Reid concurred, saying: "I am very comfortable on the full year. You've seen copper prices move up along with nickel and zinc. Coal prices have started to recover and we are very heavily exposed to early stage recovery commodities, which should outpace the late-stage commodities like diamonds and platinum."
Xstrata posted net debt of $13,1-billion compared with Anglo's $11,5-billion.
Macquarie mining analyst Sam Catalano said that Xstrata's earnings a share of 30c a share and net earnings of $909-million were 25% ahead of Macquarie forecasts and well ahead of analyst consensus.
Citi group mining analyst Liam Fitzpatrick said Xstrata's first-half ebit of $1,7-billion was 17% ahead of Citi's forecast, boosted by copper.
Davis said that the combination of Xstrata and Anglo would benefit from enhanced geographical and commodity diversification, optionality and resilience.
Xstrata's results were a win at the operating level, said Morgan Stanley's mining analyst.
Davis said that the merger of BHP and Billiton in 2001 had clearly demonstrated the ability of a larger, more diverse mining group to achieve superior and more consistent returns for shareholders through the cycle.
He said that scale provided the ability to own and develop multiple large projects without risking a substantial portion of the company's capital in any one region or to any one project, plus improved access capital, talent and new resources.
"Combining Xstrata with Anglo American, is widely accepted to represent the most compelling major combination in the industry, by virtue of our complementary asset and commodity and project portfolios, geographic proximity in key regions and the substantial and unique synergy potential of an enlarged entity.
"The combination would create a new major diversified mining powerhouse," he reiterated.
Announcing first-half unit-cost savings of $119-million or 1,1% of the operating cost base, Xstrata reported producing more thermal coal, copper, mined nickel and zinc than in the first half of 2008.
Operating cash flows of $1,6-billion were the result of first-half capital conservation, cost cutting and restructuring activities.
Gearing had been reduced to 28% from 40% at the year-end, as a result of a rights issue to repay $3,7-billion of debt.
Six growth projects were in construction, with the Goedgevonden thermal coal project in South Africa and the Nickel Rim South project ramping up to reach full production in 2010.
Xstrata reiterated that its proposed nil-premium merger of equals with Anglo remained a highly compelling value proposition for Anglo and Xstrata shareholders.