Xstrata pares operations as slowdown hits

XSTRATA, the aggressive Anglo-Swiss miner that appeared invincible during the boom, is starting to trim its Australian operations as it struggles with lower commodity prices and high debt levels. The Herald understands the miner is undertaking a stringent review of its local operations. It took its first action on Thursday when it sacked 206 workers at its McArthur River zinc mine in the Northern Territory and cut production at the mine by about 13,000 tonnes a year. But it is also reviewing capital spending, operating costs and production levels at other base metal operations, including its Mount Isa Mines copper and zinc assets and its West Australian nickel assets. Xstrata cited a combination of low zinc prices and a lack of demand for the specialised zinc concentrate as the key factors in its decision to make cuts at McArthur River. A Xstrata spokesman, Patrick Collins, said the company was within three weeks of completing an open pit development, including the controversial diversion of the river, but would finish the $110 million project using its employees rather than the 100 contractors it sacked on Thursday. Xstrata employees will also finish a $50 million expansion to the site's concentrator. In the first half, Xstrata produced zinc at an average cash cost of $US50.29c a pound, copper at $US76.9c a pound and nickel at $US3.97 a pound. Zinc is trading at $US51.9c a pound, copper at $US1.48 a pound and nickel at $US4.19 a pound, meaning the zinc and nickel operations, in particular, are only marginally cash-flow positive and unlikely to be producing at a profit. Analysts expect Xstrata will earn about $US5.4 billion ($8.4 billion) this year, the bulk of which will come from its copper and coal divisions. But if commodities remained at spot prices, a BMO Capital Markets analyst, Tony Robson, estimated earnings would fall to $US2.1 billion next year. This year Xstrata has closed nickel operations in Canada and the Dominican Republic, its Lennard Shelf zinc mine in Western Australia and slashed ferro-alloy production in South Africa because of the commodity price slump. Its shares have lost 82 per cent of their value this year. The miner has $US16.5 billion of debt, compared with its market value of $US9 billion. A Credit Suisse analyst, Jeremy Gray, said the miner was likely to curtail new projects and to cease making acquisitions. A spokesman for Xstrata Coal, James Rickards, said the group had yet to cut production or growth projects in its coal division. But he noted that while thermal coal demand remained strong, coking coal demand had weakened in recent weeks. In August the miner's board approved the $1.1 billion development of the Mangoola thermal coal mine, formerly Anvil Hill, in the Upper Hunter Valley. Mr Rickards said Xstrata had started early works, such as basic infrastructure, but had yet to commit most of the spending on the project. The company has not made public a planned completion date for the project. Mr Rickards said the aim was to open the mine "when the market is willing". ---business.smh.com.au