Glencore Xstrata hit by $7.7bn writedown of its mining assets following the complex merger that created the diversified commodities trader and miner

Last updated: August 20, 2013 8:42 am

Glencore Xstrata hit by $7.7bn writedown

By James Wilson

Glencore Xstrata knocked $7.7bn off the value of its mining assets following the complex merger that created the diversified commodities trader and miner this year. The hits to the value of Xstrata’s mines show the gloom surrounding the mining industry as prices for many key commodities have fallen amid oversupply and slowing growth in demand.

Glencore took over Xstrata in May following a year-long acquisition process. Ivan Glasenberg, chief executive, reiterated on Tuesday that Glencore believed it would be able to get more synergies and cost savings from the deal than the $500m originally promised.In its first set of results as a combined group Glencore reported an $8.9bn loss after more than $8.8bn of impairments and revaluations linked to the acquisition of Xstrata, including almost $7.7bn of goodwill and more than $1.1bn through having to revalue the 34 per cent of the miner it already owned.

Analysts at Citigroup said “this is essentially a clearing of the decks by Glencore”.

Adjusted earnings before interest, tax, depreciation and amortisation were slightly ahead of analysts’ consensus estimates at $6bn on a pro-forma basis, compared with $6.6bn on the same basis for the first six months last year.

Net income on a pro-forma basis, without impairments and other exceptional items, fell 39 per cent to $2bn but was ahead of analysts’ expectations.

Mr Glasenberg told investors the lower earnings “inevitably reflect some of the impact which financial market pessimism has had on commodity prices”. But he said after development projects were complete and within 18 months Glencore would have a “very competitive position” in its main commodities.

“We continue to see ample scope for further operational efficiencies within the enlarged group, particularly in the former Xstrata businesses,” he said.

An unchanged interim dividend of $0.054 per share was declared.

The shares fell nearly 3 per cent to 294p in early London trading after the writedown was bigger than investors had been expecting.

Glencore Posts $7.7 Billion Writedown as Profit Declines

Glencore Xstrata Plc (GLEN)’s first-half profit slid 39 percent and the world’s biggest exporter of power station coal wrote down the value of assets acquired in the Xstrata Plc takeover three months ago by $7.7 billion.

Adjusted net income fell to $2.04 billion from $3.36 billion a year earlier, Glencore said today in a statement. That compares with the $1.87 billion average estimate of six analysts surveyed by Bloomberg. Baar, Switzerland-based Glencore reported a net loss of $8.9 billion.

The $29 billion all-share purchase of Xstrata created the fourth-biggest miner and added coal, nickel, zinc and copper output to Glencore’s global commodity trading empire. BHP Billiton Ltd. (BHP), Rio Tinto Group and Glencore are among producers cutting costs, selling assets, revaluing mines and reducing spending as lower prices trim profits.

The Xstrata impairments reflect “the broader negative mining industry environment and sentiment which prevailed during the first half of 2013 and the heightened risks associated with greenfield and large-scale expansion projects,” Glencore said in the statement.

“A lot of the greenfield assets and certain assets which they had on their books we didn’t put a large amount of value on,” Chief Executive Officer Ivan Glasenberg said in an interview.

‘Jarring’ Writedown

Some investors may find the figure on the Xstrata writedown “somewhat jarring, especially given management rhetoric on capital allocation,” Bank of America Merrill Lynch analyst Jason Fairclough wrote today in a note to clients.

Glencore also posted a $1.2 billion accounting loss on revaluing its 34 percent interest in Xstrata at the time the transaction was completed, as well as a $452 million impairment charge at its Murrin Murrin nickel operation in Australia and a $324 million charge on its investment in United Co. Rusal.

The Xstrata takeover is expected to generate annual cost savings “well above” the stated $500 million plan, Glasenberg, 56, said in May. It will be “materially in excess of previous guidance,” he said today.

The combined group has interests in about 35 coal mines in Colombia, Africa and Australia, accounting for about 10 percent of global seaborne supplies of the fuel. It’s the fourth-biggest producer of mined copper and third-largest in nickel. It employs about 190,000 people in more than 50 countries across its industrial and trading divisions.

Glencore fell 1.6 percent to 297.15 pence by 8 a.m. in London. The company, 25 percent owned by management, reported an interim dividend of 5.4 cents a share.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net