Xstrata posts Las Bambas resource (March 20, 2006)

Drilling through to year-end at the Las Bambas copper-molybdenum deposit in Peru has allowed Xstrata (XSRAF-O, XTA-L) to calculate a resource.

Xstrata’s initial resource figure there is 200 million tonnes indicated, at 1.2% copper, 0.02% molybdenum and 0.12 gram gold per tonne, plus 100 million tonnes inferred with average grades of 0.9% copper, 0.01% molybdenum and 0.08 gram gold. A higher-grade skarn resource called the Ferrobamba zone, 84 million tonnes grading 1.7% copper, makes up part of the indicated resource.

Xstrata has defined two other zones that are part of the resource, Chalcobamba and Sulfobamba. The first is a zone about 1,000 by 1,000 metres with mineralized intersections to about 180 metres; the second is about 200 metres longer and 35 metres deeper.

The resource is based on a 56,000-metre drill program in 2005 that put 109 holes on Ferrobamba, 66 on Chalcobamba and 62 on Sulfobamba. Another 40 holes from previous operators were brought into the database.

Xstrata plans 100,000 metres of drilling on the project in 2006.

The company also announced that its parent company, privately held commodities trader Glencore International, would be transferring its 33% interest in the Cerrejon steam coal operation in northeastern Colombia to Xstrata for US$1.7 billion. Cerrejon has a reserve of 900 million tonnes coal and produces 26 million tonnes a year; an expansion to add another 6 million tonnes to annual production, aimed at the American power-generation market, is now going on.

The other shareholders at Cerrejon are BHP Billiton (BHP-N, BLT-L) and Anglo American (AAUK-Q, AAL-L), each with a one-third share in the Cerrejon operating company.

Xstrata posted earnings of US$1.7 billion on revenue of US$8.1 billion in 2005, for US$2.79 in earnings per share. In 2004, the company made US$1.1 billion on revenue of US$6.5 billion.

The company, which had US$524 million in cash at year-end, has been on an acquisition program, including its auction bid to the Peruvian government for Las Bambas last year. It recently announced a deal with African Rainbow Minerals (arb-l, ari-j) under which African Rainbow, financed by Xstrata, will take up a stake in Xstrata South Africa, which holds the company’s South African thermal coal interests. The move would bring Xstrata’s South African operation into compliance with Black Economic Empowerment legislation.

Under the agreement, African Rainbow will contribute R400 million (US$64.6 million) and Xstrata R384 million (US$62.1 million) to a new company, ARM Coal, which will hold a 20% interest in Xstrata South Africa and a 51% interest in Xtrata’s Goedgevonden coal project, 130 km east of Johannesburg.

Including the Goedgevonden stake, ARM Coal would hold an effective 29% interest in the coal operations, meeting the final ownership requirement in empowerment legislation that a 26% shareholding in mining companies be controlled by historically disadvantaged groups.

Xstrata is financing the R400-million buy-in on the producing operations and a R785-million (US$126.9 million) funding requirement for African Rainbow’s share of Goedgevonden. Xstrata will also advance the project funding for development of Goedgevonden. All those loans will be repaid out of cash flow, with dividends from cash flow going to the project shareholders.