Xstrata plans rights issue to raise $5.9 billion

30 Jan, 2009

Mining group Xstrata Plc plans to raise about $5.9 billion by issuing new shares to pay off some of a heavy debt burden that had worried investors. The prospect of a heavily discounted two-for-one rights issue that will triple the number of shares sent Xstrata's shares diving.
They tumbled 11 percent to 5.54 pounds by 0930 GMT, compared with a 6.1 percent fall in the UK mining index. Analyst Michael Rawlinson at Liberum Capital said the firm decided to act even though it did not have any debt repayments due until 2011 and was only in danger of violating debt covenants next year.
"As we have seen with the house builders and banks - leave it too late and it's simply not possible for the equity to survive. In summary then this was a decision to get in the front of the equity issuance queue," he added. Rival Rio Tinto, which is also loaded with debt, said on Wednesday it was considering an equity raising.
Xstrata, the world's fifth-biggest diversified mining group by market value, said it planned to issue 1.96 billion new shares at 2.10 pounds a share, a 66 percent discount to Wednesday's closing price.
"The primary objective of the rights issue ... is to ensure that Xstrata remains financially robust during current challenging market conditions and going forward, given the lack of visibility into near-term economic conditions," Chief Executive Mick Davis said.
Following the fund raising, Xstrata's net debt would fall to around $12.6 billion from $16.3 billion at the end of 2008, while gearing would decline to less than 30 percent from 40 percent. The rights issue is fully underwritten by Xstrata's main shareholder, Glencore, as well as investment banks Deutsche Bank and J.P. Morgan.
The issue was linked to a deal for Xstrata to buy the Prodeco coal mine in Colombia from Glencore for $2 billion. Swiss-based commodities trader Glencore wanted to maintain its 35 percent stake in Xstrata, so a solution was found so it effectively did not have to pay cash for it, Davis told Reuters in an interview.
Xstrata, which built itself with a string of acquisitions, was not looking at further mergers or take-overs during the global downturn, Davis said. "Now is not the time. I think that it's too early to aggressively pursue merging opportunities, and I think one has to see how the general economy, and in particular how it impacts on the mining sector, develops this year," he told Reuters. "I think that there is still a lot to unfold during the course of this year, and I just think it's just too early to act and to move."

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