Cost over-runs at the Koniambo nickel project on the Pacific island of New Caledonia were the main focus of broker coverage of Xstrata (LON:XTA) in the wake of the company’s interim results.
Yesterday the miner revealed it will spend US$5 billion bringing the mine into production rather than the previously forecast US$3.85 billion.
“According to the company, of the cost over-runs, about two-thirds is driven by “hyper-inflation” in mining project inputs and about one-third is driven by poor labour productivity and uncompetitive contractor rates,” said Jason Fairclough, analyst at Bank of America Merrill Lynch.
“Chief executive Mick Davis explained that he thinks this capex overrun is project specific and sees no read-across Xstrata’s 21 other projects which are in execution.
“The group has taken various mitigating actions including moving 11 million project hours the island via modularisation, multi-country labour sourcing & best value equipment procurement.”
While CEO Davis grumbles of industry-wide “hyper-inflation” it seems Xstrata has a very firm lid on costs, which actually fell in the first six months of the financial year.
Buoyant copper and coal prices helped lift pretax profits 29 per cent at US$4.1 billion in the six months to June 30 on turnover up US$3.2 billion at $16.8bn.
Xstrata will spend $6.8 billion this year on expansion projects, as it keeps pushing for organic growth.
All the projects are progressing on schedule and on budget with the exception of Koniambo, it said, while the company’s net debt at the period end was up marginally at US$8.1 billion.
“We expect earnings to improve further in the second half due to stronger production volumes across most divisions, lower sequential cost pressures and higher received prices in coal,” said Credit Suisse in a note to clients this morning.
“Macro events are dominating short term sentiment and direction in commodities and equities; however, we continue to favour Xstrata’s commodity exposure balanced toward coal and copper and medium term volume growth.”
Generally the coverage was positive with Merrill, Credit Suisse and Royal Bank of Scotland bullish on the stock. Respectively, the price targets are 1,900 pence, 2,000 pence and 1,575 pence a share.
Societe Generale, meanwhile, tweaked its valuation down by 85 pence a share to 1,600 pence “to capture Koniambo cost overruns”, but retains its ‘buy’ recommendation.
In morning trade the stock was changing hands for 1,213 pence, down 22 pence.
RBS analyst Nick Hatch paints a mixed picture for world’s leading miners, but remains generally positive on the sector, and Xstrata in particular.
He said: “Macroeconomic issues such as the US debt limit and the EU sovereign debt crisis as well as questions on the sustainability of China’s growth have weighed on the mining sector and equity markets in general.
“We see the potential for sustained cost pressures continuing in the second half of 2011 and modest downgrades to earnings forecasts for FY11 across the mining sector.
“As a result we remain cautious on the near term outlook for the miners. However, with volume increases, particularly in copper and coal, Xstrata may fare better than many of its peers, as fixed operating costs are spread over a greater tonnage."