Xstrata cuts divi as it announces £4.1bn rights issue

Mining giant Xstrata has confirmed a widely rumoured rights issue and has suspended its dividend as it attempts to shore up its financial position in a deteriorating environment and give itself headroom to make acquisitions.

The group said it will issue approximately 1.96 billion new shares at £2.10 each to raise approximately £4.1 billion. 

It said today's moves are 'pro-active measures in response to challenging operating conditions and uncertain near-term outlook to strengthen Xstrata's financial position.'

'The moves provided the group with significant headroom, comfortable interest cover and no significant debt refinancing requirements until 2011,' said chief executive, Mick Davis.

Xstrata said the moves will cut its debt to $12.6 billion, with gearing of less than 30%, at the lower end of the group's target range.

But the group also angered some commentators, saying it will also spend part of the proceeds to buy a thermal coal business from its largest shareholder Glencore for $2 billion.

Glencore holds only 16% of Xstrata's voting rights despite owning a 35% per cent stake in the company, but the group has often found it difficult to reassure investors that it is independent of its largest shareholder.

Chares Kernot, an analyst at Evolution Securities, said today's announcement once again cast doubt on the group's ability to make autonomous decisions.

'The market rumour that Xstrata might try to raise a little more cash than it needs to look for cheap acquisitions of bombed-out stocks was clearly wide of the mark,' he said, suggesting instead the rights issue is a deal that benefits Glencore above all other shareholders.

He described today's issue as 'a sweetheart deal with Glencore' whereby Xstrata provides Glencore with the funding to maintain its approximate 35% stake in Xstrata.

'We find it difficult to understand how a coal mine that generated peak earnings of about $50 million could be worth US$2bn (a whopping 40 times peak earnings) except that the deal provides the cash that Glencore needs to take up its rights’, Kernot  said.