Broker snap: Anglo preferred to Xstrata

20th Oct 2009 12:02

The third quarter production update from Switzerland-headquartered miner Xstrata contained ‘some solid numbers’ but FinnCap thinks investors will be better off switching to one-time Xstrata merger target Anglo American.‘Of all the commodities produced by the company, thermal coal and copper are the most important as their combined contribution could be as much as 80 per cent of group EBITDA [earnings before interest, tax, depreciation and amortisation]. So long as demand maintains the copper price at these levels Xstrata, like the other large cap diversified miners, will continue to perform well,’ the broker said.Nevertheless, FinnCap reckons that Anglo American has a higher quality asset portfolio and should be able to outperform Xstrata over the next six months, though the broker predicts that the strength of the South African rand and the Australian dollar may well continue to squeeze the margins of both companies. Having seen off Xstrata’s unwanted merger overtures, Anglo American will be motivated to sweat its assets harder, FinnCap analyst Joe Lunn predicts.In contrast, the acquisitive Xstrata will have to achieve growth organically rather than through takeovers, having pulled out of potential deals with Lonmin and Anglo, though history suggests that it might not be long before Xstrata has the buying urge again.‘The market may not want Xstrata to issue more paper at the moment – especially with the current lack of visibility over the global economy,’ Lunn notes.