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Xstrata Defers Capital Spend As Earnings Fall; Merger On Track

By Alex MacDonald LONDON--Anglo-Swiss miner Xstrata PLC (XTA.LN) Tuesday said it has deferred some of its capital expenditure for this year after reporting first-half earnings that were down by around a third, but said that timing of its growth projects remains unchanged and reaffirmed that its merger with Glencore International PLC (GLEN.LN) is on track to close in the fourth quarter. "Following a review of our project pipeline, we have resequenced capital spending and deferred $1 billion of expenditure originally planned for 2012," said Xstrata's chief Executive Mick Davis in a statement. "The timing of approvals will be sequenced to maximize returns and account for anticipated demand conditions," he added. Xstrata joins a chorus of large diversified miners including BHP Billiton (BHP), Vale SA (VALE), Anglo American PLC (AAL.LN), and Rio Tinto PLC (RIO) who have recently announced plans to review or lower their capital expenditure plans. Many of those companies face lower cash flow stemming from falling commodity prices as slower Chinese economic growth and the European Union's sovereign debt crisis hurt commodities demand. The FTSE-100 miner, which is in the throes of a multi-billion-dollar merger with commodity titan Glencore, reported a 31% year-on-year drop in operating earnings before interest, taxes, depreciation and amortization, or Ebitda, excluding exceptional gains or charges, to $4.01 billion. This was ahead of average expectations of $3.87 billion in a company consensus forecast of 12 analysts. Net profit fell 33% year-on-year to $1.94 billion. Revenue fell 7% to $15.55 billion. Despite the fall in profits, Xstrata's board declared an interim dividend of $0.14 a share, up 8% on the year. "This increase marks our confidence in the medium-term outlook for our business and prospects, and our robust financial position," Mr. Davis said. The company's gearing is at a comfortable 19%, despite Xstrata being in its peak year for capital investment, he said. Earnings fell largely due to lower commodity prices as well as higher mining costs and lower copper output as the company transitions from older copper mines to newer mines. Xstrata plans to commission ten new growth projects in 2012 and said it expects to deliver higher output in the second half of the year compared with the first half. Mr. Davis made no significant comment on its merger with Glencore, except to say that it expects the transaction to close in the fourth quarter, as previously stated. The two companies are currently seeking shareholder and regulatory approval to create the world's fourth-largest mining company, with a market capitalization of $62 billion. They are under mounting pressure from some of Xstrata's largest shareholders to sweeten the terms of the deal. The lower first-half earnings could provide more weight to Glencore's view that the current share-swap ratio of 2.8 Glencore shares for every Xstrata share is an attractive valuation. Sovereign wealth fund Qatar Holding LLC, Xstrata's second-largest shareholder after Glencore with an 11.28% stake, surprised the markets in June by announcing that it believed a 3.25 share-swap ratio was more appropriate. Another five shareholders have pressured Glencore to bump up the share-swap ratio to keep the deal alive. Those six shareholders account for about 15.1% of Xstrata's shareholder base, just shy of the 16.4% needed to vote against the deal at an extraordinary meeting on September 7. Glencore, which owns a 34% stake in Xstrata, is not allowed to vote on the deal. Xstrata's shares closed Monday up 0.4% at 883 pence a share, resulting in a market capitalization of GBP26.51 billion. -Write to Alex MacDonald at Order free Annual Report for BHP Billiton Plc Visit or call +44 (0)208 391 6028 Order free Annual Report for Rio Tinto Plc Visit or call +44 (0)208 391 6028 Order free Annual Report for Xstrata Plc Visit or call +44 (0)208 391 6028 Order free Annual Report for BHP Billiton Plc Visit or call +44 (0)208 391 6028 Order free Annual Report for Rio Tinto Plc Visit or call +44 (0)208 391 6028 Subscribe to WSJ:

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