Xstrata launches £4bn cash call to pay down debts

Gearing of 40 per cent no longer considered apt

Xstrata, the Swiss mining giant whose shares are listed on the London Exchange, wants to raise $5.9bn (£4.1bn) in order to pay off debt and buy a coal mine from its major shareholder.

Xstrata plans to issue almost 2 billion shares at a price of £2.10, some 66 per cent lower than Wednesday's 623p closing price, the company revealed yesterday.

Xstrata has $16.3bn of debt, the majority of which accrued from the $19bn purchase of Canada's Falconbridge mining group in 2006. Although the pile does not require re-financing until 2011, and Xstrata maintains it is well within its covenants, the company has been hammered by the collapse of commodity prices. It has lost around 85 per cent of its value since May, and the market shows no sign of recovery. Results for 2008, published yesterday, show pre-tax profits down 36 per cent to $5.17bn, on revenues down 2 per cent to $27.9bn.

In such economic conditions, 40 per cent gearing is no longer acceptable, Mick Davies, the chief executive, said. "It is clear that, while appropriate for market conditions experienced in the first three quarters of 2008, in the aftermath of an unprecedented financial crisis, Xstrata's absolute level of debt is now perceived as a potential constraint," he said. "Our rights issue will provide a significant injection of capital, mitigate the risks presented by the current uncertainty and remove this potential constraint."

The City responded positively, and although the share price fell off by some 15 per cent in early trading, it bounced back to close up 3.6 per cent at 645.5p.

Of the $5.9bn to be raised selling the new equity, just under $4bn will be spent bringing the group's debt down to $12.6bn, or less than 30 per cent of its earnings. The remaining $2bn will pay for the Prodeco coal mine, in Columbia, which is being acquired from Glencore, Xstrata's 35 per cent shareholder. The Prodeco deal is a mechanism whereby Glencore is able to exercise its right to take up the new share issue, although it is not able to find the requisite cash.

It is not the first time Xstrata and Glencore have come to such an arrangement. The Swiss commodities trading group also paid for its share of the Falconbridge purchase with a coal mine. In the case of Prodeco, the two groups could not agree a price, so Glencore retains the option of buying the mine back for $2.25bn within the first 12 months of the deal.

The arrangements have raised eyebrows because Xstrata's chairman, Willy Strothotte, is also the chairman of Glencore. And although the miner's relationship agreement stipulates that any discussions relating to Glencore will take place without Mr Strothotte, analysts remain sceptical. "There is no doubt that the perception will be Xstrata has overpaid to facilitate the deal going through," one said. "If they have paid too much, it is not the end of the world, but it does remind you that Xstrata is a different kind of company where these kinds of things happen."

The announcement from Xstrata comes just one day after Rio Tinto, another highly geared mining group, was forced to admit it is considering a rights issue to help meet its target of paying down $10bn of its $40bn debt this year.

As falling economic growth and restricted credit cut a swath through miners of all sizes, companies at the top end can be divided into those that are saddled with debts, and those that are not, according to Tim Williams, the global director of metals and mining at Ernst & Young.

"Historically, the mining business hated taking on debt, and financed new projects by raising new equity or from cash flow," Dr Williams said. "Those that are now highly geared will be regretting that they listened to the bankers that told them they needed more efficient balance sheets and buying assets with debt was a good idea."

Start your day with The Independent, sign up for daily news emails
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific