Xstrata, the mining group controlled by Glencore, the secretive Swiss metals trader, will breach bank covenants next year if metals prices do not rebound, according to an analyst.
Simon Toyne, a Numis analyst, calculated that the miner’s total debt will reach $16.3 billion (£11.1 billion) by the end of next year, while its underlying cash earnings will fall by some 75 per cent to $3.6 billion. That puts its debt at 4.5 times its earnings, well above the maximum four times that its creditors allow.
As a result, Mr Toyne predicted, Xstrata, down 61p at 629½p, will have to begin talks with its banks soon to renegotiate terms on its loans, which are likely to include much higher interest costs. Its problems are exacerbated by the debts of Glencore, which is its largest shareholder and has mortgaged some of its Xstrata shares as collateral.
Xstrata’s debts were racked up by buying Falconbridge, the Canadian copper, nickel and zinc miner, and Eland, the Australian platinum miner, at the peak of the boom last year. However, it will be losing money on nickel and copper by next year and only coal sales will keep it profitable.