Concern over weak dollar continues to undermine Xstrata

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The Independent Online

While the market headed north yesterday, concerns about the weakness of the US dollar weighed heavily on shares in Xstrata. The stock ended the day as the worst blue chip performer, falling 7.25p to 380.5p, as investors tried to price in the effect the continued weakness of the American currency would have on the mining group.

The crux of the problem for the group is that the bulk of its operations are in Australia and South Africa, while it posts results in US dollars. Hence the more the Australian dollar and South African rand rise against the American currency, and they achieved some stellar gains yesterday, the more Xstrata's profit margins are likely be squeezed. According to analysts, this phenomenon is more of a problem for Xstrata than its mining sector peers who enjoy the benefit of having more geographically diverse operations. They estimate that the group's earnings can be changed by a massive 18 per cent this year for every 10 per cent move in the Australian dollar exchange rate.

Meanwhile, a downgrade by the stock market heavyweight Cazenove is also believed to have taken its toll on Xstrata's share price. Cazenove is heard to have slashed its 2004 earnings estimate for the group by 10 per cent. The move takes into account the continued weakness of the US dollar and is also believed to reflect concerns at the broker that the company is far too exposed to the economic cycle at a time when global growth is faltering.

The wider FTSE 100 rose 43.0 points to 4,006.9. Sainsbury's lost 2p to 251.5p as Deutsche Bank advised its clients that the stock is worth little over 230p. Although Sainsbury's net asset value per share stands at 267p, the German broker told clients to pay little attention to this figure. It argued that this number can only come into consideration if corporate action is on the cards at Sainsbury's, a scenario that Deutsche believes is unlikely given the tough regulatory environment in the sector at present.

The broker also discarded the possibility of a bid for Sainsbury's from abroad. "The likelihood of a foreign player trying to move into the UK looks remote," Deutsche said. Hence it ushered investors into Sainsbury's rival Tesco, off 0.75p at 215p, and argued that the strong first-quarter performance at the group suggested trading at Sainsbury remained weak. This could well call into question the deliverability of Sainsbury's double- digit earnings growth target for this year, Deutsche noted.

Amersham added 10.25p to 457.25p despite a warning from Credit Suisse First Boston that there are risks to the group's earnings forecasts across all its divisions. Therefore, CSFB downed its price target to 475p from 500p ahead of first-half results from Amersham on 30 July.

Strong gains by America's Nasdaq Composite in early trade set the UK technology sector alight. Sage rose 6.75p to 164.5p, ARM Holdings added 3p to 69.5p and Spirent gained 0.75p to 25p. Autonomy gained 11p to 185p as the software group's Aungate unit launched a spam filtering product designed to assist companies in combating increasing volumes of junk e-mail.

Dimension Data was 2.25p higher at 23.75p after JP Morgan upgraded the computer network provider to "overweight" from "neutral". The US broker told investors that DiData shares had missed out on the recent recovery staged by most stocks in the IT services sector and that this has left the company greatly undervalued.

Meanwhile, Egg was not so lucky as its shares dropped 3p to 123.5p on the back of a price target downgrade by Merrill Lynch. Investors were unsettled to see Merrill cut its price target on Egg to 165p from 220p ahead of the internet bank's upcoming interim results. The main concern for the US broker is the performance of Egg's French business. It believes the division is performing at a significantly slower pace than the group's main UK operations.

Among small-caps, Global Natural Energy jumped 27.5p to 287.5p as directors added to their holdings. Lord Owen, the former Labour foreign secretary who is GNE's chairman, picked up 3,650 shares at 270p. Meanwhile, the group's chief executive, Farhad Moshiri, acquired 2,750 shares at the same price and Dennis Woods, an executive director, picked up 5,000 at 245p. Flying Brands held steady at 156.5p despite the sale of 115,000 shares by director Timothy Dunningham.

RM added 0.5p to 100p as reports from the group's meeting with analysts on Tuesday filtered into the market. Word has it the schools software company assured those present that trading during its third quarter has been in line with budget thanks to good order intake during June. The key question for RM now is how order intake will fare during the fourth quarter. July orders usually account for more than 30 per cent of the group's total revenue.