Xstrata Profit Surges on Metal Prices, Acquisitions

Swiss-based miner Xstrata beat forecasts with a 119% rise in 2006 adjusted net profit, boosted by strong copper and nickel prices, and said the industry outlook remained sound.

The London-listed firm, 36% owned by commodities giant Glencore, said on Tuesday that it made net profit of $4.89 billion, accounting for three recent acquisitions as if they had been part of the group since the start of the year.

Analysts had forecast adjusted profit of $4.6 billion, according to the average of a company poll. Xstrata made three big acquisitions in 2006 - one third of Colombia's Cerrejon coal operation, Peru's Tintaya copper mine and, the biggest, Canadian miner Falconbridge.

Xstrata shares were up 3.6% at 2,414 pence, one of the biggest rises on the UK's benchmark FTSE-100 index, valuing the firm at 22.8 billion pounds ($43.8 billion).

"Overall a solid result, highlighting the potential for strong earnings growth in 2007," Deutsche Bank analysts wrote in a research note, keeping a "buy" rating on the stock.

Xstrata has been benefiting from a boom in demand for metals, with copper prices surging around 40% in 2006 and nickel soaring around 250%, and continuing to climb at the start of this year.

But its shares have underperformed the DJ Stoxx basic resources index by about 10% this year, as prices for some of its metals, such as copper, have slipped back.

"While it is unlikely that average prices for base metals will continue to rise at a similar rate in 2007 (than in 2006), the fundamental outlook for the industry remains positive,"

Xstrata said."The rapidly industrialising economies of China and India and the satisfactorily performing economies of the older "Asian tigers" and Europe will continue to drive demand growth for metals and energy, despite an underperforming U.S. economy."

Xstrata said it had confirmed annual synergies of $545 million from its purchase of Falconbridge, topping analysts' forecasts of $300 million to $400 million.

Keeping down costs is a particular focus for mining companies amid skills shortages and high prices for fuel and building materials.

"There is some evidence that the rate of price increases (for input costs) may have slowed somewhat in the second half of the year, although it is too early to see if this will continue in 2007," Xstrata said.

The group said it expected capital spending of around $1.4 billion this year. It also announced resource upgrades for its Las Bambas and Tintaya copper deposits in Peru and an expansion in concentrator capacity at its McArthur River open-pit zinc-lead mine in Australia, and said it would make a decision on the future of the aluminium business it acquired with Falconbridge in the first half of this year. Many analysts expect this to be sold.

Xstrata proposed a final dividend of 30 cents a share, up 34% on the year before.