With a market capitalization of approximately 41.8 billion British pounds (USD67.6 billion), Switzerland-based Xstrata (London: XTA, OTC: XSRAY) has been a successful acquirer of other companies. Most recently, management has been rumored as a potential buyer of Lonmin (London: LMI, OTC: LNMIF), a company that produces platinum group metals in South Africa with a market cap of almost USD6 billion.

Lonmin trades at roughly half its mid-2007 high, despite the recent red-hot market in platinum group metals. Xstrata already owns 25 percent of the company, the world’s third-largest platinum miner producing roughly 700,000 ounces last year.

Obstacles to such a full merger include regulatory uncertainty in South Africa, which have also been rumored as a reason that Xstrata may sell its Lonmin stake instead. These uncertainties include overlapping prospecting rights that directly involve Lonmin. And Xstrata already unsuccessfully attempted a hostile takeover of Lonmin in October 2008.

The Lonmin/Xstrata rumors are part and parcel of an industry that’s both flush with cash from surging commodity prices and needy for capital and properties to meet demand, particularly from developing Asia. Getting bigger is the tried and true way to achieve that.

Xstrata is also rumored as a potential bidder for Anglo American (London: AAL, OTC: AAUKF), a deal that would almost certainly require management to divest its stake in Lonmin. And Xstrata itself is a perpetual target, with its 34 percent-owner Glencore International the almost certain bidder.

Privately owned Glencore is the world’s largest trader of commodities and would have much to gain by acquiring Xstrata’s hard assets and output, most of which is coal and copper, but also includes large amounts of nickel, zinc, chrome and lead. And the rumor mill has steadily heated up as Xstrata’s profits have continued to rise.

This year already, Xstrata has announced the purchase of a major iron ore company and plans USD18 billion of capital expenditures for 2011 globally. That will ramp up output of all its major products, adding to the massive gains logged in 2010.

The company boosted revenue 34 percent and growth accelerated in the second half of the year, with operating cash flow surging 53 percent for the year and 31 percent sequentially from the first half of 2010. Much of that gain was due to higher prices owing to robust demand from the developing world. Average copper, nickel and zinc prices rose 46, 48 and 30 percent, respectively. Ferrochrome prices surged 46 percent and coking or metallurgical coal rose 41 percent.

Output growth was also robust as new projects lifted production and acquisitions paid off. Chrome production, for example, surged 50 percent. Overall, the company has 20 major construction projects underway that will boost volumes by 50 percent from 2009 levels.

Meanwhile, the company’s focus on new properties has reduced costs, with zinc production cost per unit of output dropping 40 percent during the past two years. Nickel production cost per unit of output fell more than 43 percent and copper unit costs dropped as well. Overall, operating costs are expected to decline 20 percent over that time.

As for the balance sheet, net debt was slashed 38 percent over the past 12 months, bringing “gearing,” or debt-to-equity, down to just 15 percent. Maturing debt the next two years accounts for less than 7 percent of the firm’s market capitalization and consists of issues that should be easily refinanced at lower rates. That’s assuredly one reason Standard & Poor’s has upgraded the company’s credit outlook to positive.

The overall picture of Xstrata is a company that is successfully going ever-further, ever-deeper and becoming more valuable to shareholders in the process. Nonetheless, the stock trades at 41 percent less than its mid-2008 high, selling for less than 1.7 times conservative valuations of its formidable collection of fast-growing assets. In contrast, that valuation is less than a third that of Australian giant, and Metals and Mining Portfolio Holding, BHP Billiton (NYSE: BHP).

One possible explanation for this valuation is the market remains confused about the company’s relationship with Glencore, which essentially gives the latter veto power, or at least right of first refusal, for any takeover of Xstrata. That relationship, however, also existed at the peak in mid-2008. There’s also concern that coal sales could suffer from Australia’s floods and/or global carbon dioxide regulation.

Whatever the case, all that and a lot more looks priced in to the stock, which trades at just 8 times projected 2011 earnings that look set to grow explosively. It won’t take much to smash those abysmal expectations and send this stock back toward its old highs.

Xstrata shares sell for roughly 14 British pounds, 9 pence on the London Exchange, and USD4.44 under their five-letter US over-the-counter market symbol. The American Depositary Receipt (ADR) has good volume and provides a decent alternative to the London shares. Notice that one ADR represents 0.2 local London shares, so one needs five ADRs to own the equivalent of one actual share.

As always, we recommend buying shares in London. Buying shares across the pond has become so easy these days with commissions–in many instances–as low as when buying domestic stocks, especially if you have a serious broker. Those who can buy directly in London will probably get better execution.

New Metals and Mining Portfolio Holding Xstrata is a buy up to GBP16 in London and USD7 on the OTC market. An added bonus, management more than doubled the May “final” dividend and appears set for more boosts as profits rise. For additional information, go to www.xstrata.com.

Source: Xstrata