Strong commodity prices drove strong full-year results at Xstrata (XTA), which turned in a 34% top-line expansion, to $30.5 billion, accompanied by 53% EBITDA (earnings before interest, taxes, depreciation, and amortisation) growth to $10.4 billion, before one-time items.
Based on prevailing commodity prices, 2011 is shaping up to be better still, as CFO Trevor Reid indicated in his prepared remarks that Xstrata had booked $1.4 billion in EBITDA in December 2010 alone, which works out to an annualised $16.8 billion run rate. On a cautionary note, however, Reid also remarked that cost inflation, which had thus far paled in comparison to what the mining industry endured in the first half of 2008, was starting to build in earnest, as massive capital projects initiated by major mining companies has increased demand for skills, equipment, and key inputs.
While performance was solid across most business units (lower unit costs at Xstrata's nickel and zinc operations were notable), copper was clearly the star of the show in 2010, accounting for half of the $3.6 billion increase in EBITDA. Given the heady price of copper today ($4.59/lb on COMEX versus an average $3.42/lb in 2010) and the prevailing tight supply situation, we expect even stronger results from the copper business in 2011. For its part, Xstrata, like many large copper producers, is positioning its portfolio for a "tight supply" scenario over the next several years, aiming to grow output over 50% by the end of 2014 (mine production was 913 thousand tons in 2010). The growth effort is headed by a trio of big Peruvian projects: Antamina by late-2011 (adding 115 thousand metric tons per annum--or ktpa), Antapaccay by 2012 (+160 ktpa), and Las Bambas by 2014 (+400 ktpa).
While Xstrata boasts a particularly impressive array of growth projects, other large miners aren't exactly lacking in opportunities and ambition of their own. As a result, we'd argue that copper is increasingly looking like a "crowded trade", setting the stage for a multiyear decline kicking off in 2012 as we begin to see the fruits of big brownfield and greenfield projects hit the market (see our December article Memo to Copper Miners: Enjoy It While It Lasts for the analysis behind our copper price forecast).
As was the case with copper, 2010 was an excellent year for coal, which is Xstrata's second most important commodity by sales and profits. The year 2011 is shaping up to be yet another banner one. Prices for thermal coal and metallurgical coal are faring well at the moment, due to a variety of supply disturbances affecting the world's key sources of seaborne supply. The net impact of Queensland flooding on Xstrata's metallurgical coal assets remains unknown. Xstrata shipped a record 7.7 million tons of metallurgical coal in 2010, up 20% from 2009, with the restart longwall operations at Oaky Creek in Queensland, but is unlikely to duplicate the result due to flood-related challenges along the mine-to-port supply chain. But for tons that do make it from mine to port, pricing will be at a premium. Management indicated that it has achieved prices well above $300/ton in the spot market, which bodes well for 2011's second-quarter benchmark price discussions, which are set to commence in the next month or so. For its part, management indicated that despite the loss of tons, it doesn't expect the Queensland flooding to materially impact the profitability of the coal business as a whole.
This statement may say less about the trade-off between price and volume in metallurgical coal than it does about the relatively modest importance of metallurgical coal in Xstrata's total coal portfolio: Despite very strong prices in 2010, metallurgical coal accounted for 21% of total coal revenue, and 30% of EBITDA, far less than thermal coal's share. As such, as far as Xstrata's financials are concerned, we expect the most significant consequences of the Queensland situation may be the knock-on effect that metallurgical coal shortages will have on thermal coal pricing.
