Editor’s note:following is a letter to employees by Mick Davis, chief executive, Xstrata. On February 9, Xstrata announced a restructuring of its Sudbury operations, putting 686 employees out of work. Fraser Mine was placed on care and maintenance and both its Craig and Thayer Lindsley Mines ceased operations.
29 January 2009
Dear Colleagues,
Today we have made three important announcements – our 2008 preliminary financial results, a rights issue that will see an injection of $5.9 billion of new capital into Xstrata, and the acquisition from Glencore of their Prodeco thermal coal operations in Colombia.
Despite the ongoing credit crisis, which manifested in 2008 and the markedly lower prices of most commodities since the fourth quarter, Xstrata has delivered a highly creditable result, reporting pre-exceptional EBIT (Earnings Before Interest and Tax) of $7.26 billion and earnings per share of $4.90.
However, the dramatic slowdown in the global economy, which was particularly acute during the latter half of 2008, has created unprecedented uncertainty with regard to the outlook for economic growth and demand for commodities in the short-term.
As you know, each of Xstrata’s commodity businesses is taking decisive action through this period of uncertainty.
In October 2008, we secured a $5 billion, three-year debt facility, which has resulted in Xstrata not having any significant need to refinance debt until 2011, and increased it to $5.5 billion in January.
Across the Group, a number of discretionary expenditure items, including expansion projects, were deferred or foregone in the latter part of the year, resulting in an overall reduction in capital expenditure of over $3 billion.
The Board of Xstrata has decided not to declare a final dividend, preserving additional cash in the current financial year.
Marginal operations have been closed and capacity has been brought in line with commodity demand where appropriate, and real cost savings of $184 million were achieved in 2008, marking a sixth consecutive year of real cost savings.
Despite the current period of uncertainty and significant change at our operations, I am very pleased that Xstrata’s businesses have continued to achieve significant improvements in safety performance. The frequency of total recordable injuries recorded across the Group improved by 18 per cent in 2008 compared to the previous year, with particularly strong reductions in injuries at Xstrata Alloys, Xstrata Copper and Xstrata Zinc.
Whilst we remain confident of the medium to longer-term demand prospects for our diverse Group commodities, it is essential that Xstrata remains strong through the period of weak demand and is well positioned to take advantage of future opportunities. To this end, the management of the Group’s absolute debt levels is an important part of minimising any constraints on our ability to prosper.
In early March, our existing shareholders will vote on the proposed issue of new shares, in proportion to their current stake in the Group (Rights Issue), in order to raise $5.9 billion of cash to repay bank debt. The issue is fully underwritten by Xstrata’s banks and our largest single shareholder, Glencore, has provided irrevocable undertakings to take up its proportion of the new shares in full.
Despite the current lack of visibility about the near term prospects in many industries, the equity raising and other management actions will ensure a robust capital structure for Xstrata. I am firmly of the belief that the ongoing industrialisation and urbanisation taking place in developing markets, together with the massive $1.7 trillion infrastructure-led stimulus packages announced by the governments of major countries, will result in a return to positive fundamentals for the commodities we produce in the medium to long term.
The current global downturn is unprecedented and has required remedial action on many fronts. Employees across the Group have been impacted by these changes and their professional dedication has been recognised and has already helped to strengthen Xstrata during these challenging times. I am acutely aware also that a number of these actions will affect some of our colleagues and their families severely. In reaching the difficult decisions to strengthen our financial position, Xstrata will maintain an uncompromising commitment to the ethical and responsible behaviour which has become a hallmark of our relationships in many parts of the globe.
Sincerely
M L DAVIS
