Mining group Xstrata reinstated dividends on Monday, reflecting confidence about commodities demand and its finances after posting an expected 41 percent fall in 2009 profit reflecting weaker metals prices.

The head of the acquisitive company also told Reuters he had not discussed a possible merger with its biggest shareholder, commodities trader Glencore , but said such a tie-up could create value.

Analysts said the decision to restart dividends after suspending them during the downturn to save cash was a surprise and helped push the shares higher.

The group's decision to reinstate the dividend is evidence of the board's increasing confidence of the business outlook, Liberium Capital said in a note, repeating a buy rating.

We continue to think Xstrata looks cheap at 10.6 times (forecast earnings for 2010) even on a bearish copper price assumption of $2.50/lb in 2010.

Xstrata shares gained 1.4 percent to 963 pence by 1335 GMT (8:35 a.m. EST), outpacing a 0.2 percent increase in the UK mining index <.FTNMX1770>. They have shed 23 percent since hitting a peak on January 8.

The shares were the fourth-biggest gainer in the blue chip FTSE 100 index <.FTSE> last year, rising 209 percent, and outperformed the UK mining index by 50 percent.

Xstrata, the world's biggest exporter of thermal coal used in power plants, will pay a final dividend of 8 cents per share and planned to resume a progressive dividend policy, Chief Financial Officer Trevor Reid told Reuters.

With this large capital commitment coming down the pipe we didn't want to be slaves to an overly high level of dividends, so we started it an appropriate level and we'll seek to grow it from here, he said.

Xstrata, the first major diversified miner to post earnings this season, said Asia would be the main driver of metals demand as the pace of recovery in rich nations was uncertain.

Robust economic growth and demand for commodities from industrializing nations is likely to continue, Chief Executive Mick Davis said in a statement. The medium-term outlook for commodity demand remains very promising.

Analysts will eye the outlooks of rivals BHP Billiton and Rio Tinto when they report on Wednesday and Thursday respectively.

The company's outlook is more positive than we have seen from a mining company in the last 18 months, said analyst Rebecca O'Dwyer at Investec Securities.

GLENCORE TIE UP?

Attributable profit, excluding exceptional items and discontinued operations, fell to $2.77 billion last year from $4.70 billion in 2008, mainly due to weaker metals prices on 16 percent lower revenue of $23.5 billion.

This compared to a consensus profit forecast of $2.76 billion, according to 11 analysts on Thomson Reuters I/B/E/S.

Glencore, which owns 35 percent of Xstrata, said in December when it raised $2.2 billion there was potential for a listing and possible combination with another group.

Davis told Reuters he did not know what group Glencore was referring to since there had been no discussion about a possible merger. Clearly, when one puts together a great trading house and a great mining house, you have the potential for value creation, he said in an interview.

But there is a wealth of other issues that one would have to think about in looking at that sort of combination. But to start speculating about these type of things when there is nothing on the table doesn't make much sense.

Anglo-Swiss Xstrata has not decided whether to buy the rest of platinum producer Lonmin or sell its 25 percent stake, Davis added.

Xstrata said it delivered real cost savings of $501 million, representing a 5 percent fall in the operating cost base. The group, which last October dropped a merger plan with Anglo American , has said it is shifting its focus to organic growth from major takeovers.

Xstrata said it had over $8 billion in projects under construction and a further 10 worth $9 billion due to be approved in 2010. The mine expansions will cost $14 billion over the next three years, including $4.9 billion in 2010.

(Editing by Julie Crust and David Holmes)

United kingdom