Xstrata reinstates dividend, upbeat on outlook

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 start up 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 10.6x 2010 P/E even on a bearish copper price assumption of $2.50/lb in 2010."

Xstrata shares gained 5.2 percent to 992 pence by 9:21 a.m., outpacing a 3.3 percent increase in the UK mining index. They have shed 21 percent since a peak on January 8.

They were the fourth biggest gainer in the blue chip FTSE 100 index 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 there was potential for rising payouts, 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 in an interview.

Xstrata said Asia would be the main driver of metals demand as the pace of recovery in rich nations was uncertain.