Xstrata rights issue to net £2.9bn from investors

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The Independent Online

Xstrata launched a $5.5bn (£2.9bn) rights issue yesterday to help fund its $17bn acquisition of Canada's Falconbridge, surprising investors who had been expecting the Anglo-Swiss mining group to make a $7bn cash call.

The company said it had already felt the benefits of its acquisition of the Canadian group as a result of booming commodity prices and cost savings it has achieved since it began integrating the business.

Xstrata's fund raising is the second-largest rights issue by a UK-listed company. The telecoms company BT holds the record after its £5.9bn fund raising in 2001. However, Xstrata's ranks as the UK's largest underwritten offer, with Deutsche Bank and JP Morgan supporting the rights issue.

Surging commodity prices have boosted Xstrata's earnings and cash flow and the company is thus anticipating a strong second half. Xstrata also said that since it has started the integration six weeks ago, it has achieved higher cost savings than it had originally anticipated. It had originally pencilled in about $120m of savings a year, but declined to say what the revised figure would be. Citigroup said in a research note that it sees the potential for $200m of cost cuts a year, given the company's good track record.

Mick Davis, Xstrata's chief executive, said that the company will focus on driving cutting costs from the combined business while investing in organic growth. He added that the company is also focused on completing its review of Falconbridge's aluminium business. Simon Toyne, an analyst at Numis Securities, said he believes that business will be disposed with proceeds of about $1bn achievable.

The reduced scale of the fund raising sent shares in Xstrata 2.2 per cent higher to 2,246p. The company issued 235.8 million new shares at 1,265p each in a three-for-one rights issue, representing a 42.5 per cent discount to the company's share price before the fund raising was announced. The deep discount was much higher than analysts had expected.

The company's credit profile was unchanged as a result of the rights issue. Citigroup forecasts a year-end debt position of about $17bn.

Xstrata won a bidding war for Falconbridge this year, despite the management of the Canadian company recommending a rival bid from Inco. The deal added nickel and aluminium production to the company's coal, zinc and copper mining operations, making it the fifth-largest diversified mining company in the world. The deal addressed some of the concerns analysts had over the quality of the company's assets, including the short mine life and low margin of some of its legacy assets.

Xstrata will also look to issue bonds in the US either later this year or early next year in order to refinance some $4bn in short-term debt.

Glencore International, which owns a 14 per cent stake in the mining firm, has agreed to take up 36 per cent of the rights issue, some 84.2 million shares. It has agreed to a six-month lock-up period, in which it will not sell the shares.