Glencore International Plc (OTCPK:GLCNF) Q4 2012 Earnings Call March 5, 2013 4:30 AM ET
Paul Smith – IR
Ivan Glasenberg – CEO
Steve Kalmin – CFO
Aristotelis Mistakidis – Director, Zinc/Copper/Lead Commodity
Chris Mahoney – Director, Agricultural Products
Tor Peterson – Director, Coal/Coke Commodity
Liam Fitzpatrick – Credit Suisse
Jason Fairclough – Bank of America Merrill Lynch
Heath Jansen – Citi
Sylvain Brunet – Exane BNP Paribas
Hi, welcome to Glencore International Fourth Quarter Conference Call. (Inaudible). We probably got about between an hour and 90 minutes. With me today, we’ve got Ivan Glasenberg, CEO; Steve Kalmin, CFO; Aristotelis Mistakidis, who runs Copper, with Daniel Maté; also Chris Mahoney, Agriculture; and then, last but not the least, Tor Peterson.
With that, Ivan, over to you.
Thanks a lot for coming today. Looking at the results, you will have a look at how the company performed and an important thing that we said at the time of the Glencore IPO that the difference of Glencore to the other commodity mining companies was we, number one, we had a very diversified set, array of commodities which we trade and produce different to the other mining companies. We have both oil and agricultural products and then it sort of gives us a great diversification in these different areas.
Another point that we said at the time that we have both the trading division and we have the industrial assets. And the good thing about the trading division is not – the results are not linear to commodity prices. As you all know that on the industrial assets side of the business, when commodity prices fall, it’s very much linear results on the industrial assets. The good thing about the trading, because it’s not totally dependent upon the commodity prices, as you know, we trade the premiums of the commodities. We arbitrage. We have the transport side of the business. We have the storage side of the business. So, therefore, it’s more resilient to falling commodity prices.
So and as you can see, the results in 2012 clearly demonstrate this and if you compare our profits, our EBIT, EBITDA to the other – to our peers in the mining group, you’ll see from these figures, our adjusted EBITDA overall is down 17%, down to$4.5 billion. This is substantially a lower drop between 11% and 12% as to our peers. If you look at EBIT, a lot of our peers, their drop in EBIT is 46%, 44% and 39%, whilst overall, our combined trading and the asset is 17% down.
The good thing, as you can see on the next part of the result, is the marketing adjusted EBIT is, in fact, up 11% as against 2011. Strong performance in both the metals and agricultures part of the business. The energy side did not perform as strong, but once again, the diversification in that area of the business gave us, even with falling commodity prices, 11% growth on the EBIT side of the marketing.
The adjusted EBIT, if you look at our consolidated industrial activities excluding the pickup of the Xstrata earning on our own industrial assets, we’re down 27%. And that compares favorably to our peers. And as I said earlier, if you look at the peers, where they are, the 46%, 44%, so even on our industrial side of our assets, because of the large diversification, we’re only down 27%.
So, once again, during the RPO and during previous discussions with investors, we said that Glencore prefers to invest in less risky projects on the asset side of the business, development side of our assets. And we prefer to distance ourselves from greenfield projects which create more risk and more uncertainty, delays, et cetera, which we’ve seen that a lot of the other mining companies have experienced. We’ve rarely developed brownfield, the easier projects, and our pipeline remains overall on time and on budget. So, we’re performing relatively well on developing the various assets that we have, and Telis will talk in more detail regarding the major assets we have on the copper side both Mutanda and Katanga.
Continued growth – the good thing is our cash flow is growing continued growth. Operating cash flow is up 17% to $4.5 billion. And as we always said that during falling commodity prices particularly, we have more robust – we can deleverage budget, et cetera, and our FFO to net debt has, in fact, increased from 27.2% in 2011 to 35.9% in 2012. The final dividend of 10.35%, so we – $10.35 will be declared now, which gives us a total dividend of $15.75 which is up 5% on last year.
The Xstrata and Viterra transactions represent major advancements for the company during this year – during 2012. As you are well aware, the Xstrata transaction is progressing. We still have the details to sort out with China with MOFCOM, but hopefully we will reach the date – the new date which have been set. The Viterra acquisition has taken place, which was completed at the end of 2012. Chris will give a full detailed report how important the Viterra transaction has been for our company and how it has made us a leading player in the grain part of the business where we were a lot smaller in North America and this – for the whole and allows us to grow substantially in Australia, but Chris will give you the detail how that really affects our grain division.
So, overall, good bolt-on acquisitions, good add on easy brownfield-type bronze projects, very much. And as you will note, we have not taken any write-downs on larger items on any assets group within the portfolio. Robust 2012 as I reported down on the marketing, I mentioned the figures, but we generated $2.1 billion EBIT on the marketing. And as I said earlier, it’s an increase of 11% against 2012. Strong performance despite lower prices across base metals and coal, but there’s a higher – profit was delivered by volume growth and generally higher premiums sitting on the metal side of the business.
Looking at industrial assets, if you break them down and you exclude the Xstrata earnings, as I said earlier, we are down 27% and this compares favorably to our peers. This is reflected tight cost control on our assets and capital efficient growth philosophy where we, once again, focus on the easier brownfield-type projects. Looking at the top, the profit figure and this is just the profit – overall profit figure of the group excluding Xstrata, and as you can see net income – on the net income side of the business, we’re down 25%. And having a look at where our peers are on the net income, it is a very good result which, as I said earlier, is demonstrated, as I said on the EBIT figures, because of the diversification of the different commodities and having the trading side of the business which contributed the growth part of the profit.
Turning to the next slide, relative to performances, looking at our industrial assets and how our industrial assets performed, as you can see, absolute EBIT just once again purely focusing on industrial assets control by – in control of Glencore, we’re down 27% on absolute EBIT as against our peers and our EBIT margins have not dropped to the same effect as our peers and is relatively on a base point 340 as opposed to some of our peers, which I demonstrated over there.
Looking at the growth of the company going forward between 2012 to 2016, the big growth to 2014, once again, emphasizing a growth of our assets on our brownfield, easy expansion projects, once again, little risk in it. We have demonstrated in the past, on time, on budget. We continue – we will hold the same going forward. As you will see in most of these projects, our brownfield projects, Kazzinc, Katanga, Mopani, Mutanda, Prodeco, and they all have good CAGR growth between 2012 and 2014, 19% from a 3% growth. And if you look overall between 2012 and 2016, 11% from a 2% CAGR growth and, once again, emphasizing non-risky projects, non-greenfield, easy projects to develop, with little risk on expansion.
So, that gives you an idea of Glencore, where we see ourselves different to our peers in the mining group, having this leak situation at the time of the IPO, that it will hold us in good stead going forward and will show us different to our peers in the industry. And I think 2012 is a good year. We had falling commodity prices. And the effect it had on our peers in the industry and how the diversification really affected Glencore and once again displayed the model worked. So, I think 2012 was a good year to look at how that diversification worked.
And with that, I hand over to Steve to take you more details into the numbers.
Thank you, Ivan. And good morning to all those in the room and those that are listening either by phone or by the website as well. Four or five pages on the financial side, and then we’ll get into a few meaty business areas to tell us and then Chris here as well.
I think Ivan explained the relative movements at a headline level, at an EBITDA and an EBIT level, with reductions reflecting the fact that we had a stronger 10% or so up on the marketing part of the business. There’ll be some slides later on. And clearly, a reduction in the industrial side both through our own operations, consolidated more associates and equally throughout 35% pick-up or so in Xstrata. And we’ll provide a waterfall slide later on, which does reflect that. So, the net income level pre-exceptional is $3 billion to $4 billion, a 25% reduction.
What is worth spending just a few minutes on is how we get from $3 billion net income pre-exceptionals down to the statutory net income, there’s a few accounting areas that we’ll leave some in the room scratching their heads around what we’ve done particularly on Rusal and on Rosneft. I think those are the two that just deserve a few comments. But the technical impairment category within our $2 billion exceptionals, which is $1.6 billion. Of that, $1.2 billion reflects a charge related to a stake in Rusal. For those that have been following Rusal, it is a listed entity on the Hong Kong Stock Exchange. We have around a 9% stake. Since their listing in the end of 2009, we have always mark-to-market their particular stake. As a minority stake, we plan to do that. On the previous accounting classifications, that mark-to-market has flowed directly through to our equity position.
This year, we’ve had to recycle that just as an in and out back out of equity as it’s counted as a technical impairment, but it’s not in the classic sense that there is an asset that we’ve run or control that there’s a new sense on value. It’s always had a value. It’s always been visible by virtue of the stock exchange. And any previous mark-to-market movements have been reported in previous years in Glencore.
I think a telling slide if we look at or on page 51 of the financial statements, you’ll see that where we specifically note what our carrying value of Rusal, which is just reflective of the stock price, and we have $840 million at the end of 2012 and was $842 at the end of 2011. So, there’s been no change to the carrying value during the course of 2012 and there has been no change to the methodology that we had used to account for our Rusal stake. So, technically this has come under an impairment – no change to net assets. No change to equity of the business and I think, tellingly, the fact that our net assets and, you can see it later on or our equity at that bottom of that slide has actually gone up by 7% after paying the dividends, reflects that there’s been no change to recognition or assessment of Glencore’s carrying values around its assets.
So, if you see on page 28. You can see that recycling of that announced, the $1.2 billion out of previous – it’s called other comprehensive income for those that are more technically minded but certainly something to ponder over, but no impact whatsoever, just obviously an accounting technical issue, which we needed to deal with in 2012.
The other amount that is in there is even arguably more in the – trying to get your head around, which is $230 million charge in respect of our carrying value of our loans in Russneft. For those long-term Blanca we’ve had loans of around $2 billion after a large oil company, which has been built up by over a period of – even going back to 2003, that relationship started with Russneft. We had long-term loans that’s getting serviced in the combination of cash and various deferrals. It’s a business that’s performing very well. It’s a business that leverage has been coming down markedly, of course, in an environment where you’ve got the $100-plus oil prices. It’s around $1.5 billion EBITDA. We have equity exposure to the business. But the loan counter-factor has never been better in terms of Glencore’s visibility and its comfort in net carrying-value loan. But what we did do towards the end of 2012, there was a – I wouldn’t call it the restructuring necessarily of those loans, but there was a modest change to the terms, which we felt were actually favorable to us.
There was previously 9% interest accruing on those loans, 3% cash, 6% deferred, which changed the interest on those loans to 7.75%, keeping the cash portion exactly the same, and there’s a lower deferred portion.
But at the same time, we’re getting accelerated interest and principal payments. So, every year now, there will be an additional $50 million in cash that is contractually coming through in servicing net debt. And the repayment profile of that debt is more visible in how we expect that cash to also flow back to – back to Glencore. But again, accounting standards, and for those that may follow banks, it’s more a financial quirk around their loan portfolios. And IAS 39 is – any time you’ve got adjustments to interest rates, you have to go in effectively present value, the new cash flows at the historical interest rates, or the yield that you expected from that particular transaction.
So, we were accounting for a – stake and 8.4% effective yield. We lowered the headline interest rate. And then you just got to map the expected profile of those particular cash flows. And there was a technical impairment charge against that again of $230 million on that particular loan.
However, from our perspective economically, and I’m confident in that loan and the serviceability and the underlying performance of that particular project is arguably never been better in terms of the visibility and transparency around that.
So, a few questions have gone into the impairment side of our balance sheet, which effectively makes up the full $1.6 billion that was only small of what I would call classic impairments of around $150 million, which is a combination of taking the charge against one of our Bolivian operations during the year, I think operation Colquiri tin, in fact, down there was nationalized. You would have seen some commentary and some statements that we made and disclosed it in our interim report. We’ve taken, obviously, a provision against some of the carrying value there. And on the agricultural side, in the European biodiesel market as well, where we have two plants with increased as well, and we’ve taken some impairment against the natural element of those. So, very low levels of classic impairments and reflecting a company now in our balance sheet and where the prospects hold.
So, that’s how we get to the $1 billion. I think, tellingly, an area that we focus a lot is the cash from operations or the FFO which was at $4 billion, an increase of 17% and that would make us quite a standout in terms of headline operating cash generation and it’s reflective of both the marketing income which was up 14% and the EBITDA which is ultimately your cash and similarly the industrial part of our business excluding Xstrata which clearly our cash flow historically has been by dividends received rather than any control of those cash flows. We put a chart in the appendix which was similar to the one Ivan went through, that showed the relative EBIT movements across the industrial space. We also have the EBITDA movements which is even a healthier comparison, where out EBITDA, relative to 2011 excluding Xstrata, was actually down only 3%. So, that’s what’s driving cash flows, which with $4.1 billion which has underpinned good debt coverage ratios. We’ll talk a little bit about that.
And ultimately, what would have been a deleveraging year, but for the Viterra acquisition – I don’t know if you can say but for, but it still shows the underlying core business in a surplus cash-generating deleveraging phase cycle in the absence of other opportunities to deploy some of that cash. So, some of the items below the line was the equity up to 31.26, that’s excluding minority interest, and as you can see, up 7%, so not impacted by any revisions to asset carrying values.
The net debt number prima facie of 19% to $15.6 billion, but what we have done is show some ratios and it’s not quite a performance. It’s almost as if the Viterra transaction had happened into 2013 because the actual close of that transaction was 17th of December. The debt effect of that was an equity consideration piece of $3.6 billion. That was more – that was our share excluding – that was our share as part of the consortium. As you know, we parted with Agrium and Richardson in that particular transaction and there was around $359 million of debt that was already assumed net debt within that particular company.
So, we let that $15.6 billion down to $11.4 billion is trying to show what our debt levels have been had that transaction suddenly closed the 1st of January as opposed to 17th of December, because there’s no underlying profit, there’s no underlying cash flow from which to derive relative cash flow coverage ratio.
And that is a business going forward, which is quite different to our mining business in its classic cash flow sense and that has not a lot of a sustaining CapEx, built infrastructure and utilities, and Chris will talk about that later on, a fairly consistent expected utility life flow, flow of profits, very little maintenance capital. So, it’s a different risk profile and it’s very much a positive cash flow sort of annuity that we expect going forward in respect to that business which is positive from managing the business for cash anyway. So, we would expect that to come through in 2013 and underpin some of our ratio.
So, we do like to talk at the $11.5 billion. When Tor then comes in, we’ll talk a bit about that. And on that base, FFO to net debt, which is the main metric that we would use, up to 35.9% on 27.2%. And even at the half-year level, we’ll talk a bit about that later on. That is showing an acceleration and an improvement in our debt coverage ratios as we move forward.
On the next slide, on page five, just graphically showing the split between our marketing and industrial activities at a headline level what Ivan had alluded, some marketing income up 11% and EBIT level a little bit higher at the EBITDA level, underpinned very much by the metals and minerals continuing a robust performance there, $1.4 billion, up 10%. Good volume growth, you can see with the supply of volumes nickel, copper amongst others and, generally, healthy premium structures within many of those commodities.
Energy was efficient in 2013 on 2012 for reasons that we’ve mentioned as well: low volatility, particularly second half of the year; weak rate market, which is a factor in accessing and opening up the opportunities – the arbitrage opportunities and, just generally, a weaker coal price environment that we saw given the U.S. displacement as well. That should show improvements also as we look forward into 2013. And agricultural, a return to – from the horror, frankly, in 2011 driven by the cotton issues which we discussed at length in 2011. So, up to $2.1 billion and sort of within the range but still showing the potential of the business going forward, where we’ve sort of guided to a $2 billion to $3 billion range for that business depending on sort of macro picture as we look forward.
On the industrial side, again, Ivan mentioned, some of the drivers of that, across our own industrial category, down 33%, stripping out Xstrata. And Xstrata, also you would have seen the least hits – results today. So, you can see the drivers of the movements in profitability in that particular businesses across volumes and profits.
Metals and minerals was the heaviest hits, of course, given the backdrop in some commodity prices there. Nickel, zinc were two to highlight, down 23% and 11%. Aluminum as well does affect us. We don’t have too much aluminum exposure that’s coming directly through our own consolidated assets. But by our alumina smelter and refinery in Sherwin, Texas, there is clearly aluminium exposure, and they struggled in the lower-commodity-price environment there.
So, the metals and minerals, down. But again, positive side, it’s going forward in terms of production growth, particularly around the African copper story, and Telis will talk a little bit about that later. The energy part of the business had a strong performance during 2012. And again, diversification helping the oil business finally a full-year production out of the Aseng field, which commenced that the back-end of 2011 that that’s performed very well both in the volume sense and in the price sense as the oil price – January has held up better than the metal’s price environment.
And we do have the second field, which is due to come on line in the third quarter of this year. So, that’s going to be another leg up in terms of our ore business getting forward and all goes well for the energy product side. And nice to have the oil balance compared to coal, which is obviously in a different – in a difficult part of the cycle.
But South African coal amongst coal producers geographically where we did make some acquisitions is in much better shape cost-wise. EBIT rand and other factors down there and maybe there’s some other origins at the moment. So, those businesses are actually performing quite well.
In the agricultural side, although a fairly low base at the moment, we should see some improvements again coming through the industrial side. We got some sugar businesses with some growth there. Chris and his team both from the crushing side, there’s a few plants that we have acquired and were built in the last 18 months, which should start showing some strong performance. And what legacy industrial assets that we – that come with the Viterra acquisition that’s still maintaining the group will be part of that portfolio going forward.
So, if we just jump into page six – that waterfall chart, as I said, on the industrial side, 3.5 down to 2.3. In terms of price, to give you some splits of the 537 metals with 374 of that, energy, 141 and agricultural, 22. And on the metal side, nickel certainly was a big back there with pricing down 23%, aluminum, 16% and zinc down 11%. As I said, on the energy side, 141 – that was spot coal prices essentially out of Colombia. That would have been the major contributor there with the spot prices and indexes down around 20%, where Murrin and Prodeco were two of the larger assets impacted by price during 2002.
On the volume side, good growth and that momentum, as Ivan said, with our future growth prospects the next four or five years is also going to hold in a positive direction. Probably $807 million, $58 million in metals. So, any small pieces coming out of the metals, we would expect that to accelerate going forward. The energy side was $700 million in fact of the volume growth and that’s a big piece within the oil assets, as we said, the first full year is also South African coal business contributed nicely to that.
On the cost side, $237 million negative. That is made up $75 million is metals and $161 million is energy. The big impacts for us was essentially at some of our growth assets where the growth, it wasn’t quite there in 2012, but you still set up your business in terms of infrastructure and people and resources and everything else is geared up for being at higher levels of production.
So, I mean, Katanga was – is certainly a case in point there, where the operation is currently geared up start up, resourced up to be performing at higher levels of production. You can’t capitalize those costs and it’s classic sense, so that it gives cost increases there which affected EBIT and EBITDA. And Prodeco, also Colombian coal, from a cost perspective, a strike. There was a long three months prior which affected cost pressure and that’s – sort of volume was relatively flat over there.
On the FX side, generally, slightly weaker rand, providing some lift offset by stronger smaller currency, plus the Colombian peso as well. So, that provided a bridge in there.
In terms of the balance sheet, I think I’ve covered some of these points. The net debt, these numbers are shown pre the Viterra acquisition which, of course, if we look to 2013, we’ll then reflect that debt, and it will reflect the contributions that flow from that business which we expect to be healthy and will also reflect what we’re going to appear on Viterra is that there is a period where we are looking to dispose of some non-core assets there, some processes. Chris will talk a little bit about that. But as we look towards the end of 2013, hopefully, well, that would be better down so we’ll know the full extent of what the balance sheet looks like post Viterra.
So, strong FFO to net debt, opened $11.5 billion, and net debt-to-EBITDA improvements which would be quite rare to see those sort of trends in 2012 within an industry which is has seen reductions in cash flow and often increases in leverage trends.
Moody’s and S&P, you would have seen obviously the merger process has been dragging on somewhat, but it’s off the back of the shareholder vote of the transaction back in November last year. Both agencies published their expectations around the rating of the merged group, having full access clearly to ourselves and Xstrata information and projections at the time. So, they’d confirmed a Baa2 stable on Moody’s and a BBB stable from S&P at the time. So, that takes us in the mid-BBB space which is a – which is a comfortable starting position given the CapEx cycle that I think Xstrata’s in but ourselves also having come off some high CapEx levels, and the general economic environment that, from the agency perspective, reflect a certain cautious outlook with respect to some commodity. So, they have taken – they do run scenarios in the analysis as you can imagine as well.
So, with that, I’ll hand over to Telis to talk through DRC Copper.
Thanks, Steve. Good morning. I just want to give you an overview of 2012, last year, of what happened in our two major assets in the DRC, Katanga and Mutanda, and to just update a little bit the current status of where we stand.
The key challenge last year was power, which was a major issue for everybody in the province and contributed to loss of production across the board for just about all the boards. On the positive side, on Mutanda, the expansion, the 200,000 tons per annum assets – remains on track, is on budget and will come in on time for the end of this year.
Last year, we increased our ownership in Mutanda from 40% to 60% and December this year, there’s a put and call where we’ll go -increase by another 20% to 80%.
Katanga. Although production was below our expectations due to the power, in terms of the CapEx, again, the placement and the refurbishment of the old plant, the machinery continued on budget and on time. And I’ll just go on a little bit later on about each of them and where we stand on the capital equipment.
Just to go forward and explain a little bit on the power side in Katanga province, what was 2012 and hopefully what will be 2013. The Katanga – the demand for power in Katanga is about 650 megawatt, which is actually just about half the power in the whole country. The generation and the two electric plants in the province is 240 megawatt. And we got 150 megawatts from Inga that came down and 100 megawatts from Zambia, which, if you see, basically caused a shortfall of around 60 megawatts for deposit.
What’s changed this year? This year, the big change will be the amount of power that can be transmitted from Inga. And what compelled that last year was the fact that the converter station that was supposed to be very – the World Bank, was not. And there was a blowup in one of these things called the synchronous condenser which basically modulates the frequency. So, you cannot see the power that blew up. There used to be three. There were two. The first one blew up a few years ago. The second one was being refurbished. And the only one that was operating broke down. So, basically that left us really without the possibility to receive power, essentially, or to receive – not being able to receive clean power.
What are we doing to mitigate that? I mean, this is a program that we had started already about two years ago, which was an agreement with SNEL to invest in the form of loans, $320 million, for power generation, transmission and distribution. What the project does is it makes available 450 megawatts. 250 megawatts is new power generated, and 100 megawatts is power that we can transmit. And this will be completed by 2015.
We will require, we think, 400 megawatts. And 50 megawatts surplus goes to SNEL. And we will get payback by deducting from our electricity bills over a period around six to eight years, depending on how it actually goes. The surplus goes to SNEL.
Just have a look here a little bit on the next slide, the picture here on the right is the synchronous condenser. The one on the top is the one that blew up. That’s what it looks like. Essentially, it’s a big magnet that goes around very quickly and you can see what happens and the one at the bottom is the one that we refurbished and it’s now operating.
Just to go a little bit back on investment, $95 million will be spent to refurbish the three turbines in Inga and Nzilo; $110 million is for the transformers at Inga and on the Kolwezi end so we can receive the power; and the $115 million is the investment in transmissions line. Most of that is for the new line that feeds Mutanda.
The time line for the power generation, 25 megawatts is coming this year – will come in the fourth quarter this year, 160 megawatts at the end of next year and then 160 at the end of 2015. And that should see us, we hope, comfortable in terms of our power requirements. This is obviously something that we now really are trying to keep a handle on because, obviously, later, it was really the single reason why our production and our revenues were down.
Just to – the Mutanda where we are on the expansion, last year, we produced 87,000 tons of copper. We had 18 last days of production just due to power. The requirement for Mutanda was 45 megawatts last year and the peak this year will be 78 megawatts.
Just a few statements on the expansion, you can see there the pictures of the electro-winning, the EW essentially is the tank houses, the electronic tank houses. Six of them have been built and the seventh will be finished at the end of this month. You can see a picture of the two of the tank houses there. Essentially, we’ve got – we will have seven of those. And by the end of the summer, by the end of August, the front end – the new mill will be installed and the front end will match the back end. And by the fourth quarter, by December of this year, we will be at 200,000 tons of annualized capacity there.
Next one, Katanga – just picking up a little bit on what I said before, if you look at the total copper in ore mined, those 228,000 metric tons on a finished production of 93,000 metric tons. So, you can see what happens. We mine the copper. That part is energy-intensive but we couldn’t process it because we lost 67 days, shut down because we had no power. So, obviously, we’ve seen – we mined the copper but we couldn’t produce it, we couldn’t sell it, we didn’t get the revenues which is a shame because – not only in terms of the results of what we showed but also we’ve built up a lot of working capital. And, hopefully, what we will do now is we will feed that working capital to flow out. You can see – I mean, – this is – we subscribed for 128 megawatts. We were load shed down to 93 megawatt and after that 67 days we didn’t get any power.
Now, one of the things that we’re doing in Katanga, and you’ll see some pictures later on, is we will – we are stopping using the old Luilu refinery, which – this was built in 1956 and it’s very old, very difficult to use, it’s very inefficient and power-intensive. So, you can see that the old electro-winning, what we call EW 1 with a 150,000 ton of capacity and 53 megawatts. We got a new plant, 220 that needs 34 megawatt. So, we are investing. We’re upgrading as we’re producing.
The big power drill last year was 100 and this year, even when we get to 200,000 tons with the new refinery, we would require less power than we did last year when we’re producing around 100,000 tons.
Just going to the next slide, there’s some pictures there. You can see the top picture is the sulphide expansion lines. There are three lines of 100,000 tons. You can see the one in the right is finished and that is feeding the SX. You can see copper and the solution at the bottom which goes into the refinery.
We will be at annualized rate of 200,000 tons by the end of this year. In April, I mean, you can see the stage. We’ll have the sulphide receiving by the end of April. EW2 which is the new tank house, you’ll see a picture later on, will be finished by May already this year. The Roaster in September. The oxide receiving and the CCD tanks in September. And finally, we’ll finish the new flows that we need to build in the concentrated plant by October. And the EW plant is exactly the same as – that we’re putting in as the Mutanda 1, so we know it’s kind of expanded EW. We don’t think there’s any risk and those – the next 100,000 tons will be put – will be finished and put in by the end of next year. So, we should have Katanga running at 300,000 tons by December 2014.
Now, if you just go look at little bit on the next page, just some pictures of what we’re doing. If you look on the top left, that is what was the old electro-winning plant, old Luilu. That’s the one that I said was built in 1956. That’s the one that we inherited, that we bought, that we operated for the last two years. That’s what we’ve been producing copper from. And on the right, that is the quality of the copper that’s been coming out. And essentially it was plating at a scrap price. Why? Because these are old equipment, old cathodes. We couldn’t strip in. It was falling to bits. You had to do it manually. And if you look at the EW2 at the bottom which is the new refinery that was commissioned at the end of last year. You can see what’s the difference. And you can see the difference on the refinery itself and also the cash that was coming out. It’s automatic stripping. This is what one would consider today a modern plant.
Let’s just go to the next slide, just again, that’s what the bundles look like from the old EW1 on the left and this is what it looks like, the copper that’s coming out now. So, I mean this is finished grade A copper that we’re producing now.
Again, just some more pictures. The bottom, this is at the concentrator plant of what we call the KTC. This is the floatation cell. This is what with it looks like, bottom left. This is what it looks like at the moment. These are the new cells that have been refurbished. Again, if we just go – those are the mills at the concentrator and another picture of the floatation plant in action.
So, what we’ve been doing essentially is building the plant as would be in operating. And this is what I would think – this is a brand that we’ll be using. The cash flow that we’ve been generating and investing that cash flow into expanding the operation. We believe that we’ve turned the corner now in terms of the major challenges. We’ve been there now for four years. We think we’ve understood some of the major challenges. We think we’ve reacted to them.
And we think by – if you look at the production on the next slide, that’s a little bit where we’ve come from. Katanga is the mauve one. The blue on is Mutanda. And this is where we were in 2008. Total of 29,000 to 180,000 pounds last year. And this year, well, we’ll get an annualized capacity of 200,000 tons on each by December of 2013. So, we think that this will be the step change.
Thank you very much. And Chris, I’m glad you said a response there.
Good morning. Thanks, Telis. Okay. I will start with a little bit of info about Viterra, the acquisition of Viterra. We received final regulatory approval from MOFCOM China on December 7. That was the final day of Phase III of that process. And the transaction then closed on December 17 of last year. And since then, we’ve moved rapidly the streamline and integrate Viterra.
We have closed down their international marketing offices in Geneva, Hamburg and Barcelona because that was a duplication of what we were already doing. And the international marketing is now focused and concentrated in Rotterdam and, to a lesser extent, Singapore. All functions in Canada have been moved to Regina, and the offices in Calgary and Vancouver will be closed by the end of Q2 of this year.
We expect the sale of various handling assets to Richardson to be complete by the end of Q1 of this year. Richardson has already approved – already received Canadian competition clearance. They’ve received that in early January. Sale of the agri parts business, the agri centers to Agrium is expected to complete by the end of Q2 of this year. And Agrium’s competition filing is in progress. And we have just recently established an auction process for the sale of various non-core assets. I think we mentioned at the time of the acquisition there would be various assets from the Viterra portfolio that we would look to sell.
And we expect the sales process, subject to price, to be completed by the end of 2013. The figure at the top, if you go back to the previous slide, that is the port facility in Adelaide. There are two port facilities there. That particular one is the outer harbor with a deeper draft. The picture at the bottom, that is a country elevator in Canada. I think this one has storage of about 25,000 tons and loads – it’s a 100-railcar loader.
In our business today, in the marketing business, the key to the business, really, is logistics infrastructure. I think there is no asset-less model today for an Ag trading business, maybe not even an asset-like model. And you can see that with the acquisition of Viterra, we really have considerable global infrastructure package now. We have 22 grain export elevators with an import storage capacity of just under 6 million tons. And those elevators have an annual throughput capacity of £46 million. Of the 22, 11 were acquired from Viterra. And of the 22, 5 are in Canada now, 8 in Europe, and the FSU, 7 in Australia and 2 in Australia and 2 in Argentina.
And you can see obviously that the acquisition of Viterra gives us a very good geographic spread now. Obviously the Australian and Canadian ports were acquired from Viterra. We still have some gaps. You can see a gap there in Brazil, a gap in the United States. The other gray areas tend to be import and consumer countries.
We do have a port under construction in Newcastle in Australia and a second port under construction in Itaqui in Brazil. This shows a similar picture. With the acquisition of Viterra, we now own 274 up-country elevators, with a cumulative storage capacity of 13 million tons. 191 of this 274 were acquired from Viterra; 82 are in Canada; 10 in South America; 109 in Australia; and 73 in Europe and FSU. And you see the same picture. We – Glencore pre-Viterra, we were already strong in Europe and the FSU and obviously Viterra has the North American and Australian component.
This slide shows our ownership for processing facilities globally. And I should say that particularly with regard to crushing, our processing facility is also part of the logistics infrastructure. We have 12 soybean and swap seed processing plants, plus an additional two that are minority owned, so a total of 14; two of those were acquired with Viterra, one in China, one in Canada. We have 14 mills, wheat and rice mills. The mills are in Brazil and Uruguay. The crushing plants were in Argentina, Europe and the FSU. We have six biofuel plants. We have seven malt plants, six feed mills and two pasta plants. And those last three, the malt, the feed mills and the pasta were acquired as part of the Viterra acquisition.
If you look at the total crushing capacities or processing capacities on the right, crushing plants processed 7 million tons and mills just done 2 million; the biofuel plants just under 1 million; the malt, 700,000; the feed mills, 300,000; and the pasta, 250,000. And as I say, particularly, the softseed and the soybean crushing should be viewed as very much part of the logistics chain. When you’re running a plant of that type and Argentina is maybe the best example, the beans come directly from the farmer to the crushing plant. The crushing plant, in the case of Argentina, is coastal-located. They are processed on the coast and they come straight out as commodity on ship. And therefore, the oilseed crushing plant, for the oilseed complex, performs a similar function to an elevator in the grain business.
I’ve highlighted on the final slide three – it’s positive opportunities, but they’re macro facts, if you like, that give rise to opportunities and, obviously, there are many more. I’ve chosen three very specific areas, but if you look at Brazil, for example, the cost of transporting soybeans from parts of Mato Grosso to FOB Paranaguá is $125 a ton.
That is close to 50% the final price of the corn and 25% the price of the soybean, the FOB price of the soybean. We’ve had tremendous waiting times in Paranaguá, 20 days on average in 2011 at the peak, as high as 45 days in 2012. I think 2013 will be considerably worse because we have a very large crop in Brazil. And obviously, this illustrates the type of infrastructure capacity constraint and Brazil is, perhaps, the most extreme example, but we have similar examples of this type of thing elsewhere in the world. And this, of course, is an opportunity for Glencore to address these kinds of bottlenecks.
Secondly, and I think there’s nothing new for most of you here, but nevertheless, it’s interesting. If we look at China, if we look at pork consumption per capita, the Chinese were consuming 11 kilograms per capital per year in 1980. That was up to 38 in 2012. The equivalent number in Hong Kong is 80 kilograms per capita per year. And I don’t say it will but if China were to reach the same consumption as Hong Kong, that increased pork consumption would require an additional 160 million tons of corn, which compares to seaborne trade today of about 80 million, 85 million tons. And India, not exactly the same but has similar characteristics. And this obviously very well illustrates I think what many people know, that is the underlying demand growth that is underpinning the end markets.
The final slide is more comment on prices and price volatility. With the backdrop of that demand growth, you can see particularly in the last four or five years, we’ve had tremendous production variability. In the case of the U.S., the recent corn crop was almost 30% below the peak of the 2009, 2010. That was a drop of 100 million tons from 2009, 2010. And again, that compares to global seaborne trade in corn of 85 million tons.
If we take the example of wheat in Russia, the production this past year was 40% below the peak of 2008, 2009, that was a drop of 24 million tons and that compares to global seaborne trade of 110 million tons. And remember, that’s Russia alone. This is one of the wheat-exporting countries. And so, the real driver of the volatility, the real determinant of prices is, in fact, production, production in the context of this continually growing demand.
And so, I think with these macro considerations in mind and given the logistics and, to a lesser extent, processing infrastructure that we have not built up, over the last seven, eight years but particularly with the acquisition of Viterra, I think generally speaking the outlook for our business remains constructive. That’s all. Thank you.
Good. Thanks. Summing up, you’ve heard on both the industrial side with Steve and myself pointed out on the industrial and marketing, we’ve shown what has happened. We’ve got a summary from Chris and Telis tell us more on the production side and Chris talking on the logistics. So, as you can see and as we said earlier, 2012 was a robust performance on the marketing side of the business and we also expect the performance to be driven by naturally organic growth amongst the industrial assets of our business, and on the acquisition of the Viterra and eventually the Xstrata asset.
Now, we have proven that the marketing side is more resilient to falling commodity prices and we’ve always at Glencore alone being 50/50 combination, roundabout there depends on commodity prices. I’ve done the marketing, generate a roundabout 50% on the profit and the industrial asset 50% of the profit.
No doubt with the merger of Xstrata, we move more towards – if you look at the numbers, towards 70% generation from the industrial side of the business, 30% from the marketing. So, therefore, we may become more linear like the other mining companies and our peers towards the industrial side doing commodity prices for.
What we’ve also tried to demonstrate and what has happened in the past, as we do acquire assets whether the asset we acquired in the past or now we’re going to acquire the Xstrata asset, we get the flow of the Xstrata commodities into the Glencore system and the flow move any other mines as we grow. Mutanda, Katanga, you saw the growth we’re growing there. It helps our trading business. It helps us more especially the coal store that we get extra orders from their commodities into the Glencore system. We have the ability to blend more in the coal side of the business, on the smelting side, acquiring the smelters, we will run the business in a different manner where the smelter rarely utilizes the trailing unit whether you put the Xstrata flow concentrate into the smelter, or you bring in third party or utilizes that.
So, what I’m trying to say, hopefully, with this large industrial growth, big industrial base, we will grow the marketing side of the business. So, the 70/30 can in fact become 60/40, and that we would hope to push it towards that level because we should get the benefit on the marketing side. So, once again, protecting us as you get more and more marketing tonnages, protecting us against the commodity prices, and protects us against falling commodity prices forward. So, that’s what I wanted to point out.
What is also does – and Chris today, a perfect presentation regarding what acquisition of asset does to us in Viterra, how it helps our total – even those assets, these assets facilitating the trading side of our business, and as that’s engulfed into trading side of the business, Viterra, and other acquisitions, it helps us in that manner to grow the marketing side of the business. So, I think that part of the model has been well proven, and hopefully, we will take it further going forward in the same manner where the acquisition of these new assets from Xstrata and hopefully other assets going forward.
On the industrial side of the business, you’ve – as we’ve always said, we performed relatively well according to our – against our peers. We will continue the same type process of focusing on brownfield expansions, as I said earlier, less risky. And you’ve seen on all the expansions we’ve had within Glencore during 2012 and going forward, and Telis has given a good description on Mutanda and Katanga, two very key assets of Glencore, really brownfield expansions. Katanga, it was the merger of Katanga and Nikanor. Putting these two assets together, previously operated brownfields from the early Congo days, upgrading them until have shown existing assets which was then upgrading them. But the reserve was well known. It was the mine, both the underground and open-cut mine at Katanga.
Mutanda was already partially developed by the previous owner. So, we had a good grasp of what had to be done there. So, it wasn’t a greenfield expansion. There was a risk involved. And as you can see besides the power situation which is slowly being resolved, we will be potentially, by the end of 2014, producing 500,000 tons of copper in the Congo, potentially even taking it up to 600,000 tons in the future, with very little risk going forward.
So, there it goes the other assets which we have in the portfolio. Once again, a brownfield, getting various mines together, expanding this. The port capacity and building the new port, once again, on time, on budget. First vessels should be loading from the new port in March this year. As shown, we will get that to 21 million tons with very little risk. The same with the other assets, Kazzinc and the various industry – agricultural expansions and facilities to be one crushing facility in Argentina. Once again, on time, on budget, but not high-risk-type project.
So, I think our industrial assets have performed well. The expansions have performed well because of the more conservative approach we take within Glencore and not pushing the limit on greenfield risky type project.
So, overall, this is the philosophy Glencore will be taking going forward. Of course, at some stage, we will have to look at greenfield. And as time goes on, we will do the different greenfield projects within both the Glencore portfolio and the Xstrata portfolio and decide whether we move forward with them. And there’s been transformational project at Viterra, going forward. We will continue to add those which are now for the trading side of the business.
So, having also, as I’ve said early, the Xstrata flows, going forward, will help the business considerably so, overall, the outlook looks good. How do we see the market going forward, and we do see growth in the United States stronger than most people in envisage. We do see demand for commodity picking up. We do believe that the shale gas, and the cheap power generators being developed in United States, will grow the industrial side of the United States, which should bode well for the commodity, for our commodities demand in the United States.
China, Chris gave a little example, on the pork consumption in China, and if the Chinese starts consuming as much pork as they do in the Western world or in Hong Kong, whatever what that does for the demand for wheat, et cetera, we find the same for other commodities.
As you’re well aware, China consumes 50% of the world’s commodities or run 40% to 50% in most commodities. And the growth – what China growth is, going forward, with a 8%, 7% or 9% sales. But one thing you do note is China consumes per capita on most of the commodities as much as we do in the West. The demand will continue growing and depending upon what we do on the supply side, that will determine commodity prices going forward.
So, hopefully, as we’ve said, with a lot of the other mining companies are being more concerned about the expansion project, hopefully, we will not keep expanding mines and putting more tons into the market as we did before, which should bode well for the future.
So, I think that gives us summary of Glencore and how we’ve taken the model forward. And I think 2012 was a good year to display that the model does work, the diversification, the trading, the asset base and, as I said, that’s why we want to continue running this company for the future.
Having said that, we’re open for question. Paul? Working?
Yes. It’s working. Right. Questions. Liam. Liam, that’s you.
Liam Fitzpatrick – Credit Suisse
Morning. Liam Fitzpatrick from Credit Suisse. I’ve got two questions. Firstly, just a general one on M&A, given the scrutiny that your deal with Xstrata, another big mining deals have received, is this naturally pushing you towards energy deals and smaller bolt-ons, or would you feel comfortable in the future attempting another large mining-type deal?
And then, secondly, I think a question for Telis, you’ve already got a big footprint in the DRC but there are other assets in the region that you don’t currently have a stake in. Do you have what you need or do you think there’s other opportunities still for you?
Okay. I’ll answer the first question and leave Steve answer the second if you want to answer them. The first one, no, I don’t – look, we’ve gone through the process. There is a process you’ve got to go through when you do make the acquisition. The situation and you got to handle it in a manner in which we’ve handled it. So, it took longer.
China does take longer. Even with Viterra, I think, getting clearance in China took us 10 months. With Viterra, there really wasn’t a big reason for that Viterra was going to be problematic because none of the assets were in China – Viterra’s products are sold into China, but there’s a process you have to go through. It’s not a concern that would have blocked you buying another major asset.
In respect of Xstrata, we have to go through the process. We have a problem in EU where we do have a large amount of zinc supply both from the trading side and the asset side into the EU as we to have certain remedies which we took care of. South Africa, there was a problem – we had too much control of the local market. And then realized gain and the loss they get to begin the deal.
China is going through its process. We are dealing with MOFCOM. We’ve been dealing with MOFCOM since the third quarter last year. There’s a weekly dialogue with them. We’re going through the process. We believe we will finally be cleared with final remedies. We’re still waiting to see what those may or may not be. But we will overcome it. So, I don’t think that’s the reason – if you got to look at what companies you’re looking at in the future, you’ve got to look into different commodities, which was you may have a problem in particular reasons both locally and on in the international market. In all companies, there’s different logic, how many is being focused and continue to look at because there’s not a big overlap in the commodity side – on the same commodity. Just got to look at on them and you can decide for your own companies which can be looked at.
Liam, what’s possibly changed there is just how long you factor in…?
Worst-case scenarios, I think, that’s been the load of – underestimation as to how long it’s processed like not necessarily on the fundamental, just the way you eventually get to. And that’s not, I mean, this long drawn-out process is a process, good for anyone, but that’s 200 times higher.
Yes. Couple of things. It is safe to say we do have our hands full right now. Having said that, I mean, we do have a lot of oil in the ground. I mean, £11 million about 6% of the total. So, in terms of production, we try to, I guess put the money in the ground then buy somebody else’s share. So, I mean, having said that, we do monitor our neighbors and we talk to them. We actually have to cooperate in Katanga. So, we know what’s happening. But having said that, the one positive thing I think with the Xstrata merger coming is that it does give us balance in South America and Australia. So, we could increase our exposure in Africa easier than if – than on a stand-alone basis.
Yes. That’s what we’ve always said that pre-Xstrata merger, we very much – if you go get some more, we’re very well positioned in Kazakhstan or different areas, Colombia, et cetera. But once we merge with Xstrata, you’re spreading the word. So, then could you be big in Africa. Could you be in various parts of Africa? Yes. Of course, you’re not that exposed. We like to – we don’t want to be exposed to others, in one country where a large amount of profit generation comes from one country, and so it does give us the diversification. We could go beyond to some of these other areas. So, we wouldn’t as a stand-alone company.
Okay. Next question? Jason?
Jason Fairclough – Bank of America Merrill Lynch
Jason Fairclough, Bank of America Merrill Lynch. Two questions, if I may. One, I guess, for Chris and probably a follow-up for Telis, if that’s okay. Just, Chris, you started to hint a little bit there about infrastructure and capital. I’m just wondering are we getting now to the minimum efficient scale for this business and how much more capital is it going to consume or do you just grow without putting more capital into it? And then for Telis, just if you could give us a little bit of an update on Kansuki. Is that rolled up into the 200,000 tons or is that a separate growth opportunity?
Jason Fairclough – Bank of America Merrill Lynch
It’s rolled up. So, does that 200,000 include Kansuki?
No, the merger hasn’t taken the fact that we’re operating, that’s one.
But if you look at the power, for example, the 400 megawatt, I was wondering if someone’s going to ask me, I mean, you can see there’s some excess power to increase production. So, the size of the two assets is such that if we wanted to, we could take the 200 and add another 100.
I would tend to think Kansuki Mutanda together with the (inaudible) and also a bit of the other equation...
We will buy someone else. When you own assets, you can add another 100,000 tons quite easily.
Jason Fairclough – Bank of America Merrill Lynch
To your first question, do we now have sufficient scale yet? I think most definitely, particularly on the grain side. And with regard to some of the softseeds, I think if you look at our market shares now in the wheat market, for example, barley, softseed, we definitely have the scale, most definitely. And we have a much better geographic spread now post-Viterra.
In terms of capital, going forward, I think – well, two things. First of all, we can very easily add incrementally. And then given the spread that we now have – if you look, for example, what we did in Russia last year, we bought a port in joint venture with Kernel, but we bought a port in Taman in the south of Russia. We have 12 elevators. We can easily add elevators in Russia. We can buy or build single crushing plants in Russia, in the Ukraine, still in Europe. And I think it’s not difficult to add – I would hardly call them assets. A crushing plant, a silo is a very small investment, but given the global scope that we now have, it’s quite easy to add incrementally.
A country or two countries that might be a bit more difficult in terms of simply adding incrementally would be the U.S. and Brazil.
And to really have a presence in those countries, and particularly in the U.S., would require probably an acquisition which would require more capital. And then I think – but not – I don’t think you would have to be of the scale of Viterra, but certainly it would require more capital. And then I think it would be a matter of what it is and what is available, and do we think it will provide the right return.
Jason Fairclough – Bank of America Merrill Lynch
Heath Jansen – Citi
Yes. Good morning. Heath Jansen here from Citi. Just a question on your energy marketing business. This is sort of one area that took a hit in 2012. It looks like your margins came down from your 1% down to 0.4%. Just wondering whether you could give us some sort of indication, how much is cyclical versus structural in that business? And then if you tell us that it’s more cyclical, can you give us the driver of that? Is it really now the freight rates, wet and dry, or roll-offs of the legacy contracts? And also maybe the context of volume – I know Alex is not here but it looks like your oil volumes are up strongly. But coal was actually down as well but – yes.
Yes, I think most of that, Tor can about the coal and energy side. The oil was not bad. The oil is unchanged with performance. It’s coal that was down in the trading side compared to previous year 2011. A lot of that – well, Tor can answer that question. And it’s basically due to the situation in the United States and the effect that it had in the market. So, Tor?
You also had decreased price volatility overall. So, from a margin or a trading perspective, you’ve become – you don’t want to take additional risk for a smaller margin. So, we’ve consolidated a little bit of the trading volume. In that case, the freight is a big factor from an arbitrage on origin perspective, more important, so a non-volatile low long-term freight rate certainly hinders your opportunities of arbitrage between the origins. You also add an unwillingness to perform, to a certain extent, in China where people do the walk on a price majeure type of situations there, which again you want to mitigate that risk, you’re dealing a little bit more in the spot market as far as in terms of bigger volumes moving forward.
On the oil side, the volume is up. Look, as you personally have seen the announcement, we do have bigger tonnages coming out of Russia today. We are participating on the Rosneft recent tenders in 2012 and we will get more tonnages from Rosneft from Russia. In 2013, that will be a lot more positive. You should’ve seen the announcement previously regarding the new transactions we’ve done with Rosneft where we’ve done a pre-financing-type deal where we’ve entered into a five-year off-take agreement with Rosneft for both crude oil product. And therefore, we have a bigger source of supply coming from the Soviet Union, from Russia, which is a very important source of supply for trading volume. So, that’s a pretty good volume for the future on the oil trading side of the business.
Heath Jansen – Citi
I mean there’s also some insight is direct negative compared still in 2013?
Also, Heath, I would encourage not to look at margin percentage necessarily, but just the absolute sort of announced gross income or EBIT within those particular businesses because (inaudible) and we can generate volume for the sake of generating volume.
We can go above $50 billion of oil turnover over the stake of just sort of what we want to obviously work in markets where there is profit opportunity that makes sense with underlying drivers because it was also an environment – I mean, if you take oil prices, if oil prices go up which is a little bit, it doesn’t mean you, ironically, even if you keep your absolute levels of income the same, you’re going to decrease the margin percentage which you haven’t seen any – make any effects on your particular business.
But it was around exactly as Tor said, it was a weaker period of coal. Oil, not bad, that tide is turning as well. We’re definitely seeing those that sort of tail off a certain legacy, things on the rise, things at 2013 across the energy spectrum is better than at least the average of 2012 that’s for sure.
Yes. With tax, as for that, we’re not necessarily as I’ve repeatedly in a bulk commodity critical mass is certainly key. Diversification from origins as you – across most of our businesses is the key. But we’re not necessarily volume driven in that sense, so we’re in a period like we had in coal in the second half of the year, low priced movements. Some of those businesses don’t necessarily make sense of taking those businesses just for the sake of actually taking the business, all your strategic supplies of third parties and that are still in place will reduce volumes to a certain extent by choice to mitigate potential credit exposure.
Your spot market business, that changes your opportunities. I don’t know when you say cyclical, I think it’s opportunistic for a variety of that stuff going forward, certainly we’ve seen that in early 2013 which looks much more opportunistic from the segmentation of certain qualities and certain origins in the business. So, that can vary again.
I would say, we’re not necessarily volume driven. I figured someone would ask why our volumes are down, I think that I should maybe being conservative from a risk perspective – origins and particularly the group’s, China, India, et cetera, et cetera. The margin coming – I mean, come off. We did see a lot of people just unwilling just to perform on certain fixed price, longer term businesses. So, we’ve moved last quarter’s equation come off.
Thanks, (inaudible). Just a couple of questions. Could you sort of give us a sense as to when you’re going to give a follow-on update on the merger? Is it going to be the presentation post-completion? And just what – how will Glencore, Xstrata differ now that it’s sort of to make sure going forward?
And then the second question is – just relates to surviving as well in terms of your dividend being reinvested in shares. Do you continue to – intensely continue doing that post-merger?
Okay. I know we talked about the merger and that we will talk about the merge post-completion whether we call a conference call, how we handle that. I’m not sure if we’re going to have to discuss but I would like to be able to explain who the new management are going to be at the various sectors, how we’re going to manage it, who the people involved. So, that’s very important so we will get that across but we can only do that post-completion.
How will Glencore’s asset Xstrata be run into the (inaudible). I’m going to be the CEO in the future so nothing different to what we’ve done in the past. Now, that is – I’m talking about Glencore. I’ve explained to you today how Glencore operates. We explained to everyone on the IPO how we intend to operate as a company, how we intend to grow, how the company will work and we will stick to that successful model. We said at the time of the IPO, we’re not going to grow for the sake of growing.
This is a company – I know Sam Walsh said at the Rio presentation that they are now going to act like owners. It’s a good thing and I keep using the statement we’ve really said at that time of the IPO, we don’t need to act like owners, we are owners. So, all of us over here will grow for the sake of return on our investment to ensure we generate the right returns that we and our fellow shareholders wish to get from this company. There will be no growth for the sake of growth.
I’ve heard a statement, you’ve got to grow because your assets are depleting, and if you want to stay at the business, you’ve got to grow because you’ve got depleting assets. We don’t take that view. We will only replace depleted assets if we can replace it with assets that give us the right returns that both us and our fellow investors wish to get on these assets. So, if this company has to downscale because there are not assets to be acquired or to replace depleted assets, it will downscale and it will pay out the cash and the dividends to each shareholders. And let each shareholders take its money and invest it in a better asset than we can provide in this company.
So, we’re not afraid to downscale the assets. Hopefully, there will be more and more opportunities. We’re not a company that’s going to say, we want to grow in iron ore and well, you’re not big in iron ore, you’re going to grow in iron ore. We won’t grow in a commodity for the sake of growing because we don’t have it as a big production based in our portfolio. We have our asset managers who you see over here today, the guys who run their division.
And they bring opportunities to the top. They deal with a lot of third-party suppliers, with all the third-party suppliers, which the other mining companies don’t do. They see opportunities before anyone else does. And they bring opportunities to asset they had and say, we have this opportunity. This is an asset. It may not be the best asset in the world, but it gives us a great return. We can acquire it at the right price. We can acquire this asset next to our existing asset, Telis with Mutanda, which is Kansuki next to Mutanda, an opportunity presents itself. It’s an obvious add-on and bolt-on. So, we will grow opportunistically, latch at some ideas which come from the department, et cetera.
On the corporate side, yes, we may look at the economies as we go forward if we believe we can bring value added as to the synergy of bringing the two companies together. And we’ll look at that also, but everything more opportunistically. We’ve always said opportunities will present themselves. We see them before anyone else because we deal with third parties, and that’s the way the company intends to grow. So, really, no change.
We are afraid of greenfields. As been proven, we were correct. Greenfields are risky. Greenfields do have capital overruns. Greenfields do have delays which kill the NPVs on those projects. They may be good projects afterward, and they do generate good cash because they’re our lowest quartile in the area, but return for the regional investors, not so pretty. No one goes back and back-tests, and finally this is all going back and back-testing. And that’s putting the heat on previous CEOs. So, I think that is something that’s happened in the industry. And that’s why we are afraid of greenfields. It’s no secret. We did have one greenfield, Monaro, which history has proved was not a great investment.
So, we will try avoid them as long as possible. I’m not saying forever. It may happen in the future. Hopefully, the – if there’s paradigm shift in the mining industry, and people are stopping projects for a while while they assess what demand is doing, they’re not going to oversupply. And hopefully, the markets will start picking up in the future with limited supply, less supply coming in the market if demand is going to be strong. And then we may have utilized all our brownfields and push them to the maximum, we may have to look at a greenfield and then we will assist very, very carefully.
On my dividend, yes, I will always look at it and with the intention of investing part of my dividend back in the company I’ve done in the past. And we’ll potentially do so in the future.
And as soon as we do complete will give us much update on that in terms of structure, key personnel, active staff, process the approach that integration and then I think realistically, we’re looking at this with classic 100 days as we get full update as to how things are going on – sort of on the combined platform. So, that would be assuming completion in mid-April and you’ve been looking at sort of back into June and July.
I think, no, we haven’t talked to that on Investor Day.
Is it that sort of thing.
I mean, just one last point, talking about the dividends is a lot of – few of my fellow shareholders, employees within Glencore have also reinvested their dividends.
Thank you. One more question. Sylvain?
Sylvain Brunet – Exane BNP Paribas
Good morning. Sylvain Brunet with Exane BNP Paribas. Three quick questions. First one was to get you here on the outlook for cobalt, the prices being weak in spite of one of the end markets being aerospace. The second question was also your outlook on nickel. Latest numbers on PRN from China were actually surprisingly high and at a lower cost what you see the situation there. And the last one is a more general question, do you think that the merger should – give us some few examples of areas where you see quick wins and where to unlock value. I’m thinking either when it comes to the portfolio or non-operating expenses.
Okay. I think we don’t have a cobalt trader, but the person who speaks that the most is Telis because he’s producing a lot of propane, and cobalt is a by-product. So, maybe you can answer that question.
Yes. I mean with the opening up of the companies at Copperbelt, you’ll see a massive increase in the copper production as a by-product. And what will happen and what is happening is that the cobalt production under the primary product will become competitive, and you will have cobalt essentially coming out as a by-product of copper production.
From what our guys tell us, I mean, the underlying demand is healthy. It’s just that you’ve got a big one-off supply shock. And that’s what’s taking part there.
Talking about nickel, Kenny Ives, Head of our Nickel division is not here, but he talked about the problem that did happen with nickel, we know it. Demand does continue to grow within the stainless steel sector in China, et cetera. The problem that has occurred with nickel is the mines of nickel pig iron production in China, I think, is up at around about last year. We’ll end up at around about 320,000 tons. I think the figure is around about there, and the total production of around about 1.4 million tons, it’s pretty significant. And the Chinese continue to produce nickel and pig iron.
Two things that is going to add – some new production coming on the market a bit delayed. And probably some of the projects are delayed, we will have Koniambo from Xstrata coming onstream this year, eventually, hopefully, a 60,000-ton project. So, that is adding a bit more tons in the market. But the real estate is nickel pig iron in China.
Now, the equation is when Indonesia reduced the export of ore to China there is talk in 2014. They’re going to cut back because they want more value added within Indonesia. Whether that happens or whether further taxes are put on the exports of nickel ore, we’ve got to monitor, but that will have an effect.
And also, you’ve got to remember – so that’s going to be an interesting thing, how that affects the nickel market. The other thing is that the new projects in nickel coming now that the ones have been put on stream. They’ve been delayed in a few of the others. But at least there’s no new nickel project.
The other thing was nickel. We also got to see how much nickel pig iron can be utilized in stainless steel production, et cetera, because there’s also amount of nickel pig iron that can be utilized. So, that will also have an effect where they really got to import pure nickel.
So, those two – if you factor that affecting nickel in the future, and that’s going to be monitored.
Sylvain Brunet – Exane BNP Paribas
Okay. Great. Thanks very much.
What was it? Does that answer...? The quick fixes in Xstrata. Yeah, we’re going to talk about that when we do our presentation. I mean the quick fix is we’ve looked at various points of Xstrata. There’s different types of structures which will be put in place when we think they are quick fixes. But we’ll talk about that when we do the presentation post-merger.
Ladies and gentlemen, thank you for joining. You may now disconnect your line.
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