Xstrata: Wave of Acquisitions Propels Growth

Xstrata PLC (XSRAF.PK) has become one of the great mining success stories of recent years, growing into a $70-billion giant through a wave of acquisitions. But BMO Capital Markets analyst Tony Robson expects the dramatic earnings growth to tail off next year, and figures that it is not as attractively valued as some other big-cap mining stocks. He initiated coverage on the Anglo-Swiss miner with a "market perform" rating and £40 target price.

Mr. Robson sees plenty to like in Xstrata: good management, plenty of organic growth opportunities, a solid investor base that supports acquisitions, and a strong balance sheet and cash flow.

But on the other hand, he also points to some negatives: Xstrata's higher-cost operations mean that it will be hit harder than its peers in a commodity downturn, it is tougher to find good acquisition targets, and the shares are relatively expensive on a variety of metrics.

Mr. Robson calculated earnings per share growth of 50% for Xstrata this year, but just 10% in 2009.

In a note to clients, he wrote:

Vale (RIO) and BHP Billiton (BHP) are expected to generate more attractive total returns than Xstrata, reflecting a more appealing product mix in iron ore and oil.

Mr. Robson expects Xstrata to stay active in mergers and acquisitions, but at a slower rate than previously. He figures the company's focus will be on bolt-on purchases rather than very large deals (like its purchase of Falconbridge Ltd. in 2006).

He summed up his analysis by noting that Xstrata "cannot be regarded" as the best value in the big-cap mining stocks, as it suffers from relatively high price-earnings ratios and slow earnings per share growth in 2009. However, he wrote:

What cannot be forecast by BMO is the company's ability to exceed expectations due to value-accretive acquisitions.