Anglo cost cuts to reach £605 million

Coal stockpile at a Moura coal mine in Australia.

LONDON (Reuters) - Miner Anglo American said its cost-cutting program, a key weapon in combating a merger approach, will reach half its eventual $2 billion (1.2 billion pounds) target this year as it posted sharply lower interim results.

Anglo, under pressure to show it does not need a tie-up with rival Xstrata and can create value alone, said it had achieved $450 million of the targeted savings due by 2011.

Analyst Nick Hatch at ING said some investors might be disappointed that Anglo had not increased its savings target, but it could be holding that in reserve in case Xstrata launched a formal bid.

"Until Xstrata crystallises its interest, there is little point in providing any enhanced targets or any detail. After all, that is all good defence material for use at a later stage," he said in a note.

Anglo rebuffed Xstrata's "merger of equals" approach on June 22, and Chief Executive Cynthia Carroll declined to discuss the issue at a presentation, only saying the two firms were still in contact about their joint ventures.

Anglo shares rose 0.5 percent to 1,915 pence by 2:57 p.m., in line with in the UK mining index, but lagging a 2.7 percent gain in Xstrata shares.

Anglo stock has underperformed Xstrata's by about 40 percent this year, though it has outperformed by 70 percent since the market hit a peak last year.

Anglo posted a 69 percent drop in underlying earnings per share to 91 cents for the six months to the end of June, higher than a consensus forecast of 81 cents compiled by the company from 11 analysts.

The group, which saw revenue slip by 38 percent to $11.1 billion, has been hit by a sharp drop in metals prices, and it was cautious about near-term prospects.

SOFT DEMAND

"We expect demand to remain soft in the near term until OECD countries begin to recover materially," Carroll said.

"While we have seen some recovery in metals prices, macroeconomic indicators are mixed, and the economic outlook remains uncertain in the near term."

After tumbling last year, exchange-traded metals have rebounded, with copper up nearly 80 percent this year.

Anglo, the world's fourth-biggest diversified mining group by market value, launched a plan to cut $2 billion in costs by 2011, half from boosting efficiency and the remainder through procurement.

Of the savings achieved to date, $335 million was from efficiency and $131 million from procurement.

Xstrata has said a merger would result in $1 billion in lower costs on top of Anglo's own program. Xstrata has not released an overall target for its own cost savings, saying it has a track record of sustainable cost reductions every year since it floated in 2002.

A major shareholder in South Africa, where Anglo has the bulk of its operations, said Anglo's presentation increased confidence that the group was creating value.

"To me it is clear that Anglo is starting to deliver on its promises and will continue to take action over time," said Anwaar Wagner, portfolio manager at Old Mutual Asset Management, which has a stake of 3 percent in Anglo.

"I'm confident that they will achieve the cost savings sooner rather than later," he added. Wagner repeated previous comments that if Xstrata wanted a merger it would have to offer a premium that recognized Anglo's inherent value.

Anglo, which mines platinum, iron ore, coal and copper, said as part of its belt-tightening during the economic downturn, it was ahead of its target of shedding a total of 19,000 jobs by the end of the year and had already cut 15,405.

Anglo has also touted its stand-alone growth prospects as its fends off the Xstrata approach and said Friday three strategic growth projects in iron ore, copper and nickel in Latin America were on track to begin producing from 2011 and the group's total output was due to climb by a third by 2013.

At one of the projects, the Los Bronces copper project in Chile, Anglo said it had made two new discoveries that together boosted the firm's copper resources by 50 percent.

At the Minas Rio iron ore project in Brazil, the firm might seek a partner to accelerate expansion, but would retain control, Carroll said. Some critics have said Anglo paid too much for the deposit last year when it shelled out $5.5 billion.

Anglo, which came under some criticism by shareholders for suspending its dividend earlier in the year, said a priority would be to reinstate it when market conditions improve.

(Reporting by Eric Onstad, editing by Will Waterman, John Stonestreet)