Glencore Xstrata's CEO Discusses H1 2013 Results - Earnings Call Transcript

Aug.20.13 | About: Glencore Plc (GLCNF)

Glencore Xstrata plc (OTCPK:GLCNF) H1 2013 Results Call August 20, 2013 4:00 AM ET


Paul Smith – Investor Relations

Ivan Glasenberg - Chief Executive Officer

Steve Kalmin – Chief Financial Officer

Kenny Ives - Head of Nickel Division

Alex Beard - Head of Oil Division

Chris Mahoney – Head Grain Division

Tor Peterson – Head of Coal Division

Telis Mistakidis – Head of Copper Division


Myles Allsop – UBS

Jason Fairclough – Bank of America Merrill Lynch

Liam Fitzpatrick - Credit Suisse

Heath Jansen – Citi

Menno Sanderse – Morgan Stanley

Christopher La Femina - Jefferies & Co

Sylvain Brunet – BNP Paribas

Paul Smith

Okay. Ladies and gentlemen, welcome to Glencore’s first half results following the acquisition of Xstrata on the 3rd of May. The format for the day will be standard presentation on this occasion by Ivan and Steve and then we'll do a Q&A session thereafter. With that, I think over to Ivan who is going to introduce other participants.

Ivan Glasenberg

Thanks, Paul. Okay, good morning, welcome. I’d like to introduce you to the head of the various departments within Glencore here today. At the end, we have Kenny Ives who is the Head of our Nickel division, next to him Alex Beard, Head of the Oil division, Chris Mahoney, Head of Grain, Tor Peterson, Head of the Coal division and Telis Mistakidis, Head of the Copper division and Steve, later you’ll meet.

Okay, this is the first results of the merged company and so I am happy to say that first half results were pretty good. As you can see, solid results overall with particular pleasing performance in the marketing and as you can see the marketing division is up 6% year-on-year.

Now just once again enforces what we’ve already said in the past that the marketing part of the Glencore business can be anti-cyclical and even with commodity prices falling, as they have during the first half of the year, the marketing division performed well and was 6% up.

The adjusted EBITDA is down 9% to $6 billion and actually due to lower commodity prices and that therefore hits the industrial activities of the company. So that was the fact that adjusted EBIT is down 28% to $3.2 billion and Steve will talk further on those figures. The percentage is lower because of the higher depreciation in the company with higher volumes and the larger asset part of the division which generates it.

Strong cash flow generation with FFO of $4.3 billion and rolling 12 months FFO to Net debt of 28.2%. The net debt increase was lower than expected and as you are aware with the large capital expenditures which are taking place with the acquisition of some of the Xstrata assets the debt would have risen but it hasn’t risen as much as expected because of lower commodity prices and the decrease of the working capital release of working capital within the business.

We have over $13.6 billion of committed available liquidity lines, which gives the company a lot of headroom and as we’ve said, we maintained an interim dividend of 5.4 cents per share, which is in line with our 2012 dividend.

The acquisition of Viterra is getting very well. We are slowly getting the full benefit of this asset. Various disposals are taking place which we’ve announced recently which we intended to do and we – the certain assets which we wanted within Viterra portfolio and we are moving ahead very well with those assets to get the benefit in the Grain division.

But unfortunately during the first half of the year, the Grain division did not performed as would have liked, but that was within the grain market. The arbitrage opportunities and the prices across various countries did not give any opportunities and differentials were purely based upon the freight and I think this has been the other grain companies in this area have suffered the same problems during the first half and hopefully this will increase during the second half of the year.

We progressed with the Board reconstruction since the takeoff of Xstrata and we’ve made the appointments which we have announced earlier in the year, Peter Coates with expertise in the Mining sector, Peter Grauer and John Mack. This ensures that the Board is actually changed strong and to help the company go forward whilst we keep – we will continue to search for the Chairman for the company in the future.

We are not rushing the decision and we are going through a process to ensure we get the right person and in the interim Tony Hayward continues to remain as the Interim Chairman of the company.

The merger integration is tracking ahead of all our expectations with synergies and other cash savings expected to materially exceed the previous guidance we gave of $500 million. We’ll give more details on this when we have our Investor Day on the 10th of September and we’ll give more detail about it.

But you will recall that the $500 million which we said at the date of the acquisition of Xstrata or the date when we are talking about the merger of equals, was purely the marketing synergies that we would get between the two groups by having the flow of the Xstrata commodities coming through the Glencore system the advantages of blending products, advantages of swapping products, so utilizing different smelters for different concentrates et cetera that was the $500 million saving.

We will materially exceed this because now that it’s a different type deal. We in fact – our management is taking over Xstrata. We are now able to put the Glencore policies in place and we have now been able to look at the corporate structure within Xstrata and with much further cost savings within the different divisions and the corporate overheads which they had in the divisions, we are able to cut that and we continue looking at the asset labels, where we can continue cutting costs.

So that figure, we will discuss in more detail and give further details about that on the 10th of September. What we will have finally with this merged company and now that we are getting to better groups with how this company will look, we will be far better positioned on the cost curve.

And once we fulfill all the capital programs and all the capital expenditure on the new projects, we believe in the next 12 to 18 months when these are completed, we will be at the lower end of the cost curve on most of our assets and it will be extremely strong- the mining part of the company will be extremely strong with very good assets in its portfolio.

Looking further, breaking down the Marketing and the Industrial part of the assets, as I said earlier, the Marketing adjusted EBIT is up 6%, up to $1.2 billion. Healthy contributions comes from the metals marketing groups, reflecting the overall volume growth within the division and the support of demand conditions which we are seeing in the metal sector in the world. Volumes are growing; consumption is growing in those areas.

The energy sector of the company performed very well, in particular coal, even with falling coal prices, the marketing part of the business did very well and this is in due as we always talk about how the Marketing division operates and where money can be made with the geographical arbitrages around the world.

Planning opportunities and various ways to trade within the system where opportunities can be taken and I think coal is a good example of that even with falling coal prices, the trading part of the business performed very well.

The overall performance of Marketing in agriculture as I said earlier, products has been disappointing in the first half of the year and as I said earlier, the grain markets remain generally un-prospective in terms of these opportunities and there was no trend in the business et cetera and they were not able to take advantage of any opportunities there.

The Industrial adjusted EBIT was down 39% to $2 billion, EBITDA down 14% as I said, the differential between the 40% and 39% is due to more assets on the portfolio and the new assets being built Antapaccay et cetera which gives a higher depreciation.

Actually, the EBIT and EBITDA is down because of the weaker prices in the core commodities and the weakness was partially offset by improved production across a range of our assets and as you know we have had vast increases. Steve will take you through those details later in the production in our African copper assets.

The Antapaccay and South America production has increased now that the operation is fully built and developed and now that the port is built in Prodeco in Colombia, now that we are up to 18 million tons, 19 million tons up to full production there, that has assisted on the industrial side of the business.

Talking regarding the integration update progress, as I said earlier has been made in the integration. We’ve moved pretty swiftly on this and we’ve taken decisive action. Now that we are in control of the company and our managers, that guys you see in front of you are actively involved in bringing the Glencore culture across the asset range and to ensure that we are able to reduce overhead et cetera.

We’ve moved very swiftly in this and as I said earlier, we will exceed - materially exceed our previous guidance of the $500 million purely on the Marketing and now that we gone into the corporate structure et cetera, we’ll be able to get the benefit and rationalize head office, rationalize all the operations that existed within the Xstrata system.

Having significant synergies achieved in financing with a $25 billion revolver credit facility, bond and other facilities, that has also given synergies and benefits on the financing of the business.

What I am pleased to say, the seamless, as we’ve always said, the Marketing – what we’ve always prided ourselves within Glencore, the Marketing and the asset side of the business, the way they work together and how the synergies between the two departments, as you can say and that we believe there is a benefit of having the marketing and the asset side of the business together and the benefits that brings, we have captured very swiftly within the Xstrata assets.

And I’m pleased to say that management at the Xstrata assets have worked well with us to ensure this is being captured. So that has worked fairly seamlessly and quickly and the benefit of that will be obtained already in the second half of this year.

But we’ll give further details, how we are looking at the assets within Xstrata the portfolio of assets, the cost-cutting measures within the various assets on the 10th of September and that you’ll get a better feel of how we are achieving these cost benefits to get the full synergies across the two companies.

And with that, I hand over to Steve to give more detailed financial analysis. Thanks.

Steven Kalmin

Thanks, Ivan and good morning to those physically here and those that are attending via the webcast or on the call in the respective time zones. First in terms of the financial statements that we released this morning, it’s fair to say this is one for the accounting, sort of geeks if you like that has accounting standards and the technical aspects. There is a lot of material for them climb into and some you may have to consult maybe more robustly with some of your accounting colleagues within the banks or within the investor universe.

I would like to, just make a special thanks to my team, at least on the accounting side that was able to deliver these combined numbers with an acquisition that did of this size and this complexity that did close or close to the 30 June period on the 3rd of May and the work involved both in the acquisition accounting to integrate systems to be able to get out numbers in a way that hopefully it sort of delivers the sense that we are functioning already as one company.

We have a group on the numbers today. We have groups on where we are heading within the business and the team – the accounting team, the finance, the refinancing exercise and that includes people from both Glencore and some individuals clearly that have come across from Xstrata side as well.

To put some perspective around the overall shape of numbers, what I’ll talk to generally in the next four five slides is predominantly get around pro forma, which is as if the acquisition had completed 1st of January 2012. So it’s the full effects as we combine business both in a production sense and in a financial sense.

Of course, the statutory accounts or the packet that’s delivered this morning has a variety of numbers. The historical Glencore PLC listed entity in its legacy sense of having been a standalone company with its 35% of Xstrata performance acquisition accounting then on the first week of May. So we got two months consolidated, four months of equity and the acquisition accounting through that day one goodwill impairment will go through that later was a clearly statutory entity.

So they are pro forma numbers. What will also complicate things slightly going forward and I think Paul and Martin and Lisa on the side will sort of provide both the basis and the means with which to analyze and look at those businesses going forward. There were some changes in some JV of accounting going forward in respect to Xstrata’s three big JVs historically, sort of a combination projects down in South America.

You’ve got Cerrejón Antamina, Collahuasi with the respective partners you are very familiar with those operations, Xstrata historically used to proportionately consolidate those as was allowed by virtue of those structures. So you would have seen the underlying attributable EBITDA based on their share of those particular projects coming through.

As of 1st of January the option to consolidate based on the nature of those entities disappeared which was the way Glencore was used to actually historically account which was always the preferred treatment that Xstrata’s treatment was certainly allowed, that allowances is no longer available and those accounts from a statutory sense will be picking up almost treating as equity account. So just have one lion share of earnings.

The underlying nature of those operations is still such that they are not companies of themselves that manage their own capital structure. They are flow through entities from a production sense, from a cash flow sense and in terms of underlying earnings and cash flows and pro forma balance sheet positions, we have provided those information.

We’ll be reporting ongoing on a basis consistent with the past if they will be proportionately consolidated and the financials that you are seeing today provide all the bridge as you’ve seen at both the – whether it’s revenue, whether it’s EBITDA, whether it’s CapEx, you will see how we provide the building blocks. That will be unfortunately a feature of the reporting going forward. The other statutory pro forma acquisition accounting that really was a one-off feature for this particular year.

So hopefully we’ve provided everything that makes sense in the pack this morning. We’ve certainly attempted to, if there is still areas which you wish to go through in further detail, please get hold of us we have all the building blocks and all the numbers together into that.

So these numbers as we said on a pro forma sense half year-on-half year revenue is fairly stable, it’s not a number we tend to focus on. We do – and obviously other companies could, so, it’s so massively affected by the marketing part of the business which is more of an overall gross income or EBITDA business and necessarily what the revenue is going to be influenced by what was oil prices and what the volume is during that particular period.

But as Ivan said, adjusted EBITDA, just down 9% period-on-period. I think that’s a sector-leading position in terms of where things move between the two periods just be down 9% that is really buffeted expect as Ivan said, by the Marketing business which was in fact up at the EBITDA level, up 14% and Industrial was down 14% to give an overall blend of being down 9%.

So effectively a pleasing result there influenced by clearly commodity prices, but marketing upheld and we are starting to see volume growth come through which underpinned and cushioned some of the effects of the weaker prices. As we work our way down the income statement, clearly the variances get larger as Au taking a percentage over a lower base and you have the impacts of the non-cash depreciation coming through. So that hits both.

The EBIT line will provide a bridge later on at least on the Industrial side and the net income line is certainly 28% and 39%. FFO, the actual cash flow generation defined as per bullet point number three, you can see below just down 9% consistent with the EBITDA which is what you would expect there.

A few snippets on the balance sheet side, net debt as calculated by us with full offset for the RMI was up about 19%. The actual funding part of the balance sheet was much flatter, given we did had a large release of that RMI which would be pleasing to many as they try and see how this balance sheet can be a proactively managed.

Just the liquidity of that RMI would adjust to the funding part of the balance sheet and they are all those out there in these credit universe, but in equity universe that don’t give us the full benefits in leverage for that RMI, some of that haircut that stuff, so we take the full haircut, for those of you that – I mean, we take the full 100% on the RMI. For those that maybe take a haircut, it gives that you will find a flatter net debt potentially in the way you do your calculations as would clearly the rating agencies, like Moody’s do a 50% haircut for RMI which you’ll see a lower trajectory in terms of debt there.

So where we are in the cycle, given a trough type earnings in coal and nickel and with the CapEx trajectory, still going through 2013, but then starting to materially decrease into 2014 and 2015, the 28.2 FFO net debt we feel is a good position to be at the moment and where we see trends in both leverage and in relationship to cash flow over the next 12, 18 months getting positive.

We do have a few asset disposal processes. I’ll talk about that later on. On the Viterra that we’ve announced a few and that clearly where we end up on this will be quite a – quite being able to move those numbers materially potentially as well.

If we move to the marketing graphically split, into three different segments, you can see the 6% growth in EBIT, a 14% at the EBITDA level. There is more depreciation coming through as we’ve taken on a bit more on the logistics, handling, storage, sort of the marketing business we commit a little bit more capital there.

Fairly stable, slight improvement in the metals and mining, it’s really been a bedrock of this business over many, many years. The fact it itself is represented by multiple commodities and components within the copper zinc, within aluminum, within all the steel products area; it’s been the more stable performer of Glencore’s overall segments over the years.

Good volume growth, you’ve seen as well in the marketing and supportive demand conditions. Iron ore business from a small base that’s also increased volumes up 50% very strong zinc volume growth as well coming through the structure as well.

The energy products that was the big recovery from a tougher Half One 2012,you’ve seen that went up 43% both on coal and oil side, meaningfully contributing to that increase and looking good on the energy side.

The agricultural side as Ivan said was the weakest spot clearly in 2013, but again, within the overall portfolio it’s played a significant role in previous periods and we would expect that to also support the business going forward. It was a tough general environment also exacerbated and Chris is with us today. He talk a little bit more in maybe some Q&A on that.

Top procurement sourcing logistics issued in South America both in Brazil and Argentina during the first six months of the year and the generally subdued environment that you are seeing it within the overall competitive landscape for the agricultural. But Viterra on the material side, that should start delivering the increased synergies now it’s second half 2013.

It was a complex transaction given the size and many respects more complicated even in the Xstrata transaction, just structurally having to buy a head company and then having to warehouse numerous assets until that was sold including the Agrium and the Richardson piece which are most of that’s out the way, that’s still part of the Agrium business, which is still to go its non-core assets which we are selling.

So, it’s been particularly complex, it’s been a major not distraction, that’s what you got to do, but it’s certainly been a big focus of Chris and his team that wouldn’t ordinarily be the case in a normal environment as well.

On the industrial side, break it up between EBITDA and the EBIT, as Ivan said in the slide, they are in the pack as well, EBITDA just down 14%, which is respectable reduction in the current weaker commodity price environment. You’ve seen the splits over there but, there is a bridge which I’ll provide later on, but on the metal side, in fact EBITDA was only down 4%, EBIT high at 25%, clearly more depreciation coming through particularly in the copper side of the equation as well.

But fairly flat EBITDA performance which is a respectable and that was buffeted by some of those volume improvements, particularly in copper that we saw with African copper, Telis is here, he can talk clearly to that more, but that was up 40%. You saw our production report last week as well.

The Antapaccay in Peru project was commissioned towards the end of the last year from Xstrata side and some positive performance little bit from the Australian copper at least period-on-period. So strong performance there. The main weakness was in the coal business. Clearly, in the Industrial side, maybe less weak than some that may have even envisaged given that particular environment, but we saw declines of 32% and 59% respectively.

Just given the relative sizes between coal and oil, the oil business is growing in significance it’s a nice absolute value, but it get dropped currently within the overall energy spectrum, oil was down a little bit, but wasn’t enough to sort of counteract what was happening fairly in the coal business as well. But again, positive stories on the production side, Prodeco clearly delivering under its expansion.

Unit cost savings there, we announced 12% by virtue of moving to direct loading as well. So good performance there, Australian Coal Thermal is currently in a low priced environment also is making headway and at some point in time that will be set up for positive earnings momentum and we’ll allude to a lot more of that on the Investor Day on the 10th of September.

Agriculture, very small part of the industrial and generally weak and lower processing margin that’s crushing it by diesel, it’s sugar at the moment as well. At some point that will start heading in the other direction, but currently it’s not going to be a needle move to one way or another in the particular business. It’s a small part of the business and generally there more to facilitate trade and they are to derive standalone earnings.

As we said on the – this is the industrial bridge on a pro forma, you can see price, clearly the main impact between 2013 and 2012, $2.2 billion, of which little over $1 billion of that was purely on coal with prices at least of index terms down anyway between 10%, 15%.

But our realized prices were more or like 15% to 20% be at in both the coking and in the steam coal products. That was $1 billion and $1.2 billion was on the metals side with copper $820,000 making up the full extent with copper prices being down 7%. But also some impacts on zinc being felt not through the zinc price, but some of the byproducts, particularly in silver and as it gets extracted from some of the primary zinc and also copper producing some secondary gold as well, impacting the prices.

Volume, as we said was a good counteract to the performance during the period was 795 that was mostly on the copper side. You’ve seen the volume performance of copper up 20% so 734 in fact to that 795 was in respect of copper. Then that’s split quite evenly between Africa, the various projects we have there and the former Xstrata copper business primarily South America with Antapaccay. There was a little bit in Queensland.

Little bit in nickel volume growth, the Murrin Murrin performing well in a tougher nickel environment and hasn’t sort some of it get lost in the story, performing well, but it’s not nickel’s day at the moment. From a cost perspective, overall net 254 reductions. That’s a net of both cost increases which maybe either through a general inflation environment, but then offset through lowering of cost through both CapEx and just generally synergies and streamlining of operations of which we are very focused on that.

And that will be an area where I think best to define to the 10th of September, we’ll really go into a lot of detail on the full Industrial spectrum as it’s set with our trending, where we see the cost curves, what the nature of those synergies from Xstrata both from a more corporate but also some synergies which we are looking at the operational side as well.

But overall, even in this environment, where synergies was not really a feature of that 254, net-net, it was a 2% reduction, around 2% of the opening cost base and that’s net of the inflation. So that was all good.

Most of it was in fact coal-related. Prodeco, we said delivered unit cost savings but also the Australian portfolio I think as all the businesses that was part of both Glencore and the former Xstrata particularly either to do with the merger coming and the general coal environment that was the one that the coal team led from Sydney and looking at Australia first but other parts of the business started rationalization.

Cost reduction, streamlining already towards the September last year. So that had a head start in some of that 254 being delivered through the coal business. FX contributed 334 essentially all South Africa the Rand impacting the energy side which was coal that we have in South Africa and the metal side essentially the chrome business that we have down there.

The Rand was about 16% weaker period-on-period the Aussie impact only really came down towards the end of the quarter and we’ll start feeling the benefits of that more of a second half. It’s still averaged over parity for the first six months of the year almost similar to what it was the previous year. So, Aussie dollars definitely going to provide relief and somewhat of a lag positive impact in earnings trajectory going forward as we look towards the second half.

As Ivan alluded to between EBITDA and EBIT, we recognized $500 million of depreciation and of that metals is $362 million of that and the copper is $229 million, Africa copper et cetera and South America and the energy side is about $129 million of that which is all coal through Prodeco and in South Africa. The $79 million of other is some corporate savings which already manifested themselves during the first six months of the year.

You’ve seen the bridge there. On the balance sheet side of the business, again, pro forma numbers, as we provided strong liquidity position as Ivan mentioned, $13.6 billion. We’ve never been this liquid as a business through some preemptive refinancing of facilities that released the working capital, this flows through clearly to the liquidity position that our group treasurers never slit so well in his life. So that’s sort of comfortable with very few near-term debt maturities as well.

We have a small bond maturing in the next month or two, but very comfortable towards the end of 2013 with some maturities starting maybe 2014, 2015, 2016, which we can look ahead to. As we said strong cash flow coverage ratios for where we are in the cycle and the earnings period and with visibility around what 2014, 2015 is going to start looking at.

We did to the debut US dollar bond issue back in May which was a very successful transaction, $5 billion, $13 billion order book or so. What shouldn’t be lost is the refinancing of the full spectrum of our revolving credit facilities that again was the cleansing of all the historical facilities that both Glencore and Xstrata has.

So again with the new credit being launched around its own prospects and its business interaction, $7.3 billion that is one of the largest bank non-event driven refinancing working capital type facilities certainly in recent memory and in the history of financing.

So big facility, in fact scale back from that $19.5 billion of orders there. Three tranches now, one three and five, so we’ve gone even longer in those facilities as well and pricing reflecting the sort of more of industrial nature of mix of Glencore’s business which did delivered some financing synergies I think as Ivan alluded to and the big effort there, 80 banks or so in that facility.

The investment grade ratings have been confirmed with all information we know today at the level of our strong BBB, BAA rating at both Moody’s and S&P stable. Their reports are fairly current. I’m sure you’ve all looked at those and those are – that is part of our financial targets, priorities is the maintenance thereof.

That was stable, in fact slightly less during this period also due to volatility and you would have seen in some agricultural side as we alluded to as they’ve been scaling back of some of the activities during that period and a big working capital release, that’s a pro forma release of $4 billion.

Primarily the inventory side and primarily agriculture also during the period, commodity prices of course also providing some input there. You can see what I said earlier on around the net debt was up 29% to up to 34% with that full offset on the RMI.

The actual funding part 47.9% to 49.2% was only up $1.3 billion which – and with strong liquidity with very manageable structure and as soon as we get through the CapEx, 2013, 2014, we’ll provide updated guidance again on the 10th of September, which should been paired with this business from a deleveraging potential becomes quite fast as well. The main statutory effect and that will be the remiss not to – at least spend a couple minutes on it was the first half 2013 impairments.

This is again what’s gone through the statutory that’s not factored into those pro forma numbers, the two items they are largest of course is the Xstrata acquisition related goodwill impairments you can see $7.6 billion. If you just take through some of the building blocks that have gone into that, it wasn’t a cash transaction as you all know.

So it’s not a defined consideration from which we said we paid a certain amount of cash with this $1 billion, $2 billion, $5 billion, doesn’t matter what the story, it was all shared and it was going to be somewhat hostage in calculation sense to what was the share price of Glencore on the date that the transaction having to close.

It was a long drawn out process. We know that’s gone 15 months that happened to close 3rd of May 2013, which was a price at the time certainly higher than where we are today. So the standing point was somewhat out of our hands.

That - can they stand in front upon us and said the consideration you get at these many shares, your share price on the 3rd of May was x, y, z, the exchange rate was y and your purchase price for accounting stand as your consideration was the $44.6 billion, wherever the number of 44 point something.

Now that wasn’t a number that was another thing came necessarily. It was just a number that you need to start with this particular number. Separately to that, clearly a comprehensive process was then conducted across on a global basis using external valuers and some arms and legs clearly to support that process, that’s a comprehensive process to – almost rebuild up Xstrata’s valuation from an accounting perspective from the bottom up.

Look at the coal business, look at the copper, look at the nickel, look at the debt, look at mark-to-markets, look at provisions, looking at tax, you got to look at everything there, which we took the Q2 sort of macro environment sentiments in commodities was more cautious and semi-bearish at that particular point in time.

Commodity prices clearly have come off quite a bit since the second half of last year. So all these things will run through assumptions and again, valuing assets is sometimes – there is a spectrum, it’s not an exact sign. So there is the – being able to be aggressive on values.

There is clearly the ability to be extremely conservative. I would say, we’ve taken overall a more conservative stance to the valuation allocation that’s in – certainly it’s not in our interest, I don’t think it’s in any one’s interest to take an aggressive, because you’ve stuck with these valuations clearly going forward for the future.

So we came up with a number $37 billion was the net at the gross list with that and the $7.6 billion is purely a mathematical of saying $44 billion is the number, $37 billion was still the overall valuations that we’ve built up and the $7.6 billion was sort of the day one saying we can’t base the numbers and the models support these.

Now, clearly, and it’s been a consistent stance within Glencore in general and both attitude approach and commitment to early stage greenfields and some of these things that clearly that was an area where we were conservative. But those are – they will have the – which has just taken a conservative stance on those projects going forward and that will part of the business going forward.

We need to think about how much we are spending on these options for the future, that to sell or you want to hang on. So these are all things that given a generally constructive view towards the overall commodity dynamics going forward. There is clearly value there, but that’s part of the number that we’ve come up, $7.7 billion.

There was a small adjust on the Glencore side which again in the interest, anything we did on the Xstrata side, we have to follow through all those same assumptions, whether it be pricing, whether to everything within to the legacy Glencore business, around plants and everything else and the one write-down.

The one impairment was around 450 that we made in respect to the Murrin Murrin nickel, as I said performing very well operationally, just a quote in the across five of the overall nickel margin environment at the moment. But performing very well, good asset actually generating cash, but we would just had it on the books for a bit more than – we are comfortable with at the moment which is the 425.

So I think that covers the financial side, no doubt. There will be questions as we move through the day. So, let me hand back to Ivan to wrap that up.

Ivan Glasenberg

Thanks, Steve. Okay, concluding remarks before we take questions. Basically, as we said, these results demonstrate the benefit of the diversification which we have in Glencore. We’ve always said the benefit of Glencore is, we have both the marketing and industrial assets, the synergies between the two different areas works well and I think these results prove it once again with the declining commodity prices, the Marketing still performed very well.

We got the diversification of the different commodities; none of the mining companies or trading companies has both the assets and the trading plus the diversification of the commodities. We have the metals, we have the oil side, and we have the grain side. And as demonstrated this first half, when grain is down, metals is up, when oil, coal performing the different manner, all sorts of the diversification definitely works.

As I said, the commodities and the assets and the marketing part of the business. What is also pleasing is that the marketing department, the volumes have increased, what is also good, which we mentioned earlier that the flow of the Xstrata commodities into the Glencore system has occurred very quickly.

The benefits of getting these flows, the blending, the arbitrage opportunities, the swapping opportunities, the movement of concentrates through different smelters and utilizing the smelters as a trading tool is working very well.

And that is pleasing how quick we’ve managed to get the advantage of that and the extra tonnage which comes from Xstrata should enable us to increase the third-party tonnage in view of the blending opportunities and utilizing the smelting facilities for this benefit.

Overall, how do we see the future of the commodity prices and what’s happening in the industry? What is good and what we look at all the time and what is occurring and you guys see it when you look at the rest of the mining industry and what has happened to the austerity programs in the mining industry.

It’s clear with the new CEOs which have come into the mining industry and are taking control of these companies; they are definitely focused on the austerity and not chasing tonnage for the sake of tonnage and not building new assets or focusing on building new assets to get more tonnage into the system.

They all have the problems on existing assets which they are building, it’s clear they have a cost overruns, the same has occurred with some of the Xstrata assets which we have and everyone is getting to groups of that and ensuring that the projects which they have on their books right now that they get them up and running as fast as possible.

So that is occurring in the industry, maybe that is putting a bit of pressure on pricing, we are not getting the full benefit of the prices yet, because these are new supply to the system, but the good thing about it is no new big growth on the books of any of the mining companies which they intend bringing to the system.

So the austerity in the mining world is happening. So the equation is how do we see demand and what is happening on demand in the industry, we remain positive. We see demand continuing and consumption of the commodities which we produce and market is increasing.

So we see solid end use and growth in that sector on the back of China – the growth in China with the 7%, 7.5%, the growth which we are seeing in America and the GDP growth that is occurring there. So we remain pretty positive on this sector at the moment.

As I said earlier, the merger integration is tracking ahead of expectations. We are getting the benefits very quickly, definitely on the marketing side of the business and as we said, we are getting further into the corporate overheads and looking closer at the assets.

And as Steve mentioned on the coal side, we’ve started getting quick into those assets and the cost savings have been fairly dramatic over there and as I said, we will far exceed our previous indicated $500 million figure, but we will give further details on that on the 10th of September.

What is also good, what is this company – how does this company look going forward? It has its great marketing division, but it also had now – has the asset part of the business, as I said, when these assets that we finished the growth profile of the assets and we finish all the capital expenditure in the next 12 to 18 months, we will have a great set of assets at the low end of the cost curve will be real cash generators even at the current commodity prices.

And the company should then be very well positioned for the future. It generate vast amounts of cash. We don’t have big capital programs ahead when we finish the existing capital program we should finish in 2014, we gave indications what those will be at the time of the acquisition, I think it was 14, 9 and 7 going forward.

I think, as we will announce further details on that on the 10th of September, that could potentially, if we reduce that the potential sale of Los Bambas, the company should be in a very strong position going forward and it should generate vast amounts of cash, provided that we don’t have further acquisitions or further project developments and you know our policy regarding Greenfield expansions.

And also certain amount to the write-down Steve mentioned with regarding the Greenfield projects which we are exiting on Xstrata’s books. We know that – pushing those projects, we will keep them delayed et cetera and maybe sometime in the future, but in no rush to develop any Greenfield projects. So I think the companies will position now going forward.

And with that, we are open for any questions.


Myles Allsop – UBS

Myles Allsop with UBS. Just a couple of questions to start with. First off, Ivan, for you, maybe good to get a sense as to what motivates you, you’ve obviously IPOed Glencore now, you’ve done the merger. You’re in the middle of a integration, why do you want to take the Group forward?

Do you ever get pressure from your wife to take it easy now that you’ve done all this? So, it’d be good to get a sense as to kind of the future over the next three, four years? And then maybe a question as well on the net debt.

Could you just run through, because obviously your operating cash flow was pretty robust, when I see, whether CapEx was at $3.3 billion, we see the dividend payment was, well I can’t quite get my head around is, why your net debt went up by $5.6 billion in the six months? Thanks.

Ivan Glasenberg

Okay, the first question, I can answer easily the second one, Steve, I’m sure can answer easily. But, the first question firstly, in the next three to four years I don’t see myself going anywhere, so I don’t think my wife wants me at home, yeah. As long as these guys don’t want me, those are the guys that are going to decide where I am going to be in three, five, ten years’ time. I don’t know, it’s up to them. I’ll speak around, I’ve always said, I am staying around as long as they want me there and none of them want my job.

So right now, I am here. So I am not going anyway. The question that you say, where do we see the company going in the next three five years’ time, as I’ve always said, this company, we work opportunistically. We don’t sit here and have a grand plan. There are certain things which are obvious to us.

The company and I don’t need to take you through it, when we were private company, we knew, we couldn’t sustain continuing to purchase assets, having assets on our balance sheet and remaining as a private company because the shell that departed you have to pair a shell of this and the balance sheet structure did not work, the capital structure did not work remaining as a private company.

So therefore it’s obvious on our agenda, take this company public. Once we went public, or even before we went public, we knew we owned 35% of Xstrata at that time, it was time for the reasons we’ve just laid out today, it was time to put these two companies together and that was important.

So that was the obvious things on the program to get those together. The next obvious thing that we talked about, let’s get the synergies, all these things we’ve spoken about, let’s get the synergies from Xstrata number one and let’s get the Xstrata culture into the Glencore culture and let’s cut corporate overheads, let’s get the assets running tight.

Let’s reduce staff at the operations that are not required and let’s get the mine managers into the Glencore culture working close with us, working close with our marketing team to get the best value for the company. So those are the obvious things and that’s taking time.

As you can see, it takes time, we try to do it as quick as possible, but those are the obvious things. So way too from here and you say where do want to go. We got a bunch of guys, they are always looking to grow the assets out of the divisions and grow the divisions and they want to grow the divisions and that’s what they here for.

So they grow the divisions, number one on the marketing side and number two on the asset side of the business. Now each one of them are looking, they see opportunities which no one else sees, that’s what we always try to emphasize, we have these discussion in shale’s et cetera.

We see more than any other mining company, oil company, or anyone sees, because we trade with a lot of third-parties. So we trade with thousands of different third-parties, they talk to us daily, we buy their product, we know the assets, and we see opportunities before other people see opportunities. So as I say, I don’t know what those are going to be.

These guys have a whole bunch of people they are talking to, they come up with opportunities daily to grow their business and we’ll see where those end up. So we are looking at stuff to develop the business. We do like to keep as you've seen, we are focused on one thing, return on equity.

We are not going to bring assets, because Alex Beard wants to grow the oil business for example anyone to buy an asset, because he wants to have bigger production, he won’t do that. He will look at and say, does it give me the right return? I have a cost of capital within the division.

I got to get the right return on my equity and that’s what we are going to be focused on and that’s what we’re always been focused on, whilst we remained as a private company, I think over the last 10, 20 years, we have the average return of 30% return on equity.

Now with the bigger equity basis, it’s harder to achieve that 30% equity return, but we will be based on a massive large equity return. We - even today, we won’t look at assets unless we get a real big equity return. We know we got a balance sheet.

Steve insist to keep – well, we definitely want to keep our balance sheet investment grade rated. So therefore anything we acquire or any capital we use, it’s really got to make a lot of sense. Otherwise, we would just kick out the cash and pay out dividends to our shareholders. Steve, you want to talk on the net debt?

Steve Kalmin

Myles, thank you that was a good – it’s shows you’ve been through the release. It’s probably the only piece of sort of bridge that’s not there and maybe I should have given that within the actual presentation. But that was on a pro forma basis, so 29.2 up to 34.8, if you just jump down these five, sort of four numbers, you will get there. So, 29.2, starting position, FFO profile was 4.3 which we have given.

The CapEx pro forma was 6.3. I think you looked at the statutory number, this is obviously on a pro forma. So CapEx was 6.3. There was an increase in non-current loans which you see more out of the Glencore statutory cash flow was $1 billion.

The biggest amount in that during the period was our participation in that – pre-export facility which at some point we will monetize that through repayment and/or some sale or banks potentially coming into that facility at some point in time, but that’s $500 million we’ve got in that particular facility as well.

There was a small amount of $0.2 million in other investments, the dividends as you said, $1.3 million and then the balancing item was in fact, this just excludes the RMI part. There was actually a buildup in working capital on a pro forma of around $1 billion that came from Xstrata assets, because while they go through their industrial growth phase.

There is some increases through their processing and raw material consumable phase, particularly assets like Koniambo there has been a build-up in working capital as they gear up to the achievement process at that levels and also in some down South American corporate.

Jason Fairclough – Bank of America Merrill Lynch

It’s Jason Fairclough, Bank of America Merrill Lynch. Two questions, one for Steve and one for Ivan. Steve, just on the working capital, if I get push on that, so you talked about the working capital inflow in the first half on a pro forma basis. To what extent are we going to see that reverse in the second half as Ag ramps up? And then I guess, second question is for Ivan and it’s just on the write-down, I get that it’s not on cash, I get that it’s an accounting thing. But to me it still speaks to something being overvalued at the time of the acquisition and when you look at that $1 billion number what do you think of it?

Ivan Glasenberg

Steve, you take the first one.

Steve Kalmin

Okay, well the working capital, as you said was about $4 billion pro forma, $4.9 billion Xstrata having sort of buildup of day one, we wouldn’t be expecting it to necessarily increase, maybe agricultural side came down, but they were more of quite a high level. As you saw some working capital will build into the previous period, so it’s not at a ridiculously low level either necessarily at the moment. And you’ve got, bigger profiles of course within the metals and they also have been historically been bigger in size than the agricultural surprises. In the absence of a big price increase, which will be fantastic? I wouldn’t expect working capital to move higher. We’ve also got the abilities through what we’ve inherited now with Xstrata to manage working capital little bit more tighter. I think we have more tools available to us through the way we can manage working capital. Banks, financing thereof, we haven’t clearly as of 30, June, we weren’t in a position to go grab their working capital by this. So, I think we have opportunity to even reduce further, but I am not necessarily factoring that taking that into account.

Ivan Glasenberg

Okay, third question, Jason. Yeah, look it’s a matter of time. It’s not the cash price, it’s a share price, so we are using shares as good as cash really. You got to look at that, but, it was a share price at a particular point in time. Had we looked at the share price, I think 30 days later or something like that, the write-down will most probably $2 billion. I think, it’s something I think I am correct, Steve.

Round about this, so it was a point in time. Not correct, at that point in time, we got to take this $8 billion write-down because we have both the set of assets, but with the all greenfields in these assets as I said, there is a lot of Greenfield and with the Glencore policy restating, we don’t believe we are going to develop these Greenfields right now, maybe sometime in the future, maybe we’ll sell them we are not sure.

We’ll see what happens with them. But, within the Glencore policy and the way we would value assets that is a write-down we had to take in a way. Now, is that really money lost, I don’t know, time will tell. The balance, yes if you do the valuation from bottom down, and the way we did to the valuations at that point in time, commodity prices had come off, you utilize the particular prices at the time and it gave you that value.

Now, will this be recovered and we have to do it fairly. We had to do it at the time as Steve says, we also utilize the same number for the Glencore assets and that above to a $455 million write-down of the asset. So, yeah, there was a point of time, we didn’t have anything on the Glencore on the Xstrata assets will have that.

Now will that be recovered as time moves on, commodity prices pick up, the synergies are may hopefully bigger than what we envisage they are going to be, we have to talk about them in September. I hope even what we say in September, we can even get more than those figures as time goes on and we get a better group of the assets and the so-called we paid the right price and therefore that write-down maybe –should not exist in five years’ time. But time will tell.

Jason Fairclough – Bank of America Merrill Lynch

But for now, you are relaxed?

Ivan Glasenberg

For now I am relaxed, for now I feel, we feel comfortable and we feel we’ve got a set of assets which we can work on. We feel the set of assets taken and being honest to ourselves and putting them at the value that we believe at that point in time being that we paid, looking at the share price on the day was $44 billion that is basically what you were paying for the assets, but when you value the assets, you got to a number of $37 billion on that method of valuation, taking the write-downs and all the Greenfield’s et cetera, I think we feel comfortable going forward.

Jason Fairclough – Bank of America Merrill Lynch


Liam Fitzpatrick - Credit Suisse

Good morning it’s Liam Fitzpatrick from Credit Suisse. Two questions, firstly, on the aluminum and warehousing situation. I guessing, you can’t say too much on the current legal situation, but how do you think the structure of that industry plays out over the medium term and can you put any sort of numbers around how that could potentially impact your business over the coming years?

And then secondly, on coal, prices have clearly lodged down a little bit lower over the last six months, but the outlook in the report I think is fairly positive, I mean, Tor, maybe your outlook over the next year I would say?

Ivan Glasenberg

Yeah, I’ll answer the first one and Tor can talk on coal and aluminum as you correctly say, we are in litigations ongoing we can’t say much. Point one, number two is, the mines that we get from the way is immaterial to the figures.

Tor Peterson

On the coal side, we see demand kick in. Today you have, in thermal market I assume you are referring to, the seaborne market, the overall seaborne market is about 935 million tons. We see that demand strong going forward, from a seaborne thermal perspective even rising above 1 billion tons by the end of 2015 the big growth markets we continue to see are India and China.

You also have larger growth markets Turkey, Vietnam, even potentially Brazil. Yes, we have seen the price come down, but today you have an interesting situation where you have about 35% of the world’s production in producer cost above the current spot rate. So we do remain optimistic.

I don’t think that’s sustainable going forward, particularly the high cost United States producers, the Russian producers, even some of the higher cost Australian producers. You also have a key element in the coal margin which is a little different from some of the other markets in terms of the segmentation of qualities and you are really selling a variety of products, you have a variety of smaller markets in the bigger market.

So we remain optimistic and that’s just because of products that we’re producing from an equity perspective and even the ones we can procure from third-parties, match what we believe to see the demand for what we call premium markets or premium products in that sense. I think the cost structure to where we sit from an equity perspective positions us well even to absorb this downturn at the moment, but from a demand perspective, we continue to see strong demand for thermal coal in the seaborne market.

Heath Jansen – Citi

Heath Jansen here from Citi. Just another question on the impairment, Steve. Obviously, the $7.6 billion is pretty much attributable to the industrial assets, so I am just wondering when you did that fair market test, whether you assumed any sort of asset optimization of efficiency gain sort of going to come through on that.

And I guess, going forward and it seems like you’ve recognized $5 billion of goodwill sitting in the marketing operations which seems like all the synergy gains that you expect to the $500 million is being allocated to that. So just wondering whether you could clarify that?

And then maybe secondly, just on some of the marketing side of it, obviously you got improvement in energy with Tor and Alex, just wondering you could give us a split between oil versus coal in that and whether that you are starting to see the legacy wet freight starting to roll-off now on those numbers and whether – seeing that pull through and then maybe with Chris, obviously it was a difficult first half, can you give us any more detail about why you think those arbitrage opportunities are going to come through in the second half? Thank you.

Steve Kalmin

Okay, Heath, I think there was about seven legs to that question. I’ll take the – in terms of impairment, we have – you kind of have to value it, based on what you required at the time and I think you can take some near term synergies into account which were things that we had dealt with extremely quickly, almost that first sort of day one month around, corporate overhead that then have been allocated to the departments.

So they were sheltered in from some corporate allocation that was previously the case within Xstrata and they could value their business going forward with that away. Now second phase is we’ve always said, we are now, if you are getting to the granularity of the businesses and you look at optimization and shared services, working with neighbors and all sorts of stuff where we think we can add a lot of value.

None of that or very little of that to us, I’d say would have been taken and also areas we may be able to reduce sustaining CapEx and other optimization things, I would say very little. So there is some upside and that closes Jason’s gap hopefully also as we sort of work on some of that, because that hasn’t been fully reflected I would say, somewhat, but not fully reflected.

The marketing side was the full $500 million of marketing synergies putting some sort of DCF multiple on there and feeling comfortable and that was a number that was already sort of tied out taken and felt comfortable at the time of the merger that was announced back in February that even Xstrata bought it to go on record and said we are comfortable with this thing.

All the work we’ve done in the last both through integration and through 12 months that’s passed is to feeling increasingly confident about – obviously delivery of those synergies and effectively being able to capture that to a goodwill. And you can because you generated that, in terms of incremental earnings that you expect to go forward. Industrial goodwill doesn’t really sit well with accounting. I mean, companies have industrial goodwill, but that’s either a value on stuff in the ground or get rid of it.

Tor Peterson

Alex, talk, you made the money.

Alex Beard

It’s just in the spirit of team work, let’s put it at 50-50, if we are allowed. I’ll divert to Steve on the exact details maybe on the 10th of September as Ivan said, we’ll give you little bit more details, but from a coal perspective, I actually think what we’ve been saying from the inception it’s really from going public the structure of our decision to recognize coal a little bit different from some of the other commodities, whereby to recognize that origin arbitrage, the quality arbitrage, the blending.

Even from a non-equity perspective, simply traded tons that’s served us well in the first half of this year and I have ever reasonably – which can service well for the entire 2013 going forward from the global positioning that we have to be in every origin market from coal despite as I have said repeatedly, of course we are not agnostic to price movements and certainly - from an equity perspective, of course, from a trading/marketing perspective, it’s really the blending and capturing the arbitrage origin opportunities that is what our business is all about.

I think, we’ve proven that in the first six months of 2013 and hopefully going forward. So, from a coal perspective that’s what we said obviously, from an equity perspective, different story in terms of outright pricing, but there too I think, by using that marketing trading capability and structure that we have, the equity tons have benefited relative to our peers on a like-for-like basis significantly in 2013, I would expect that going forward.

Ivan Glasenberg

Yeah, that’s an interesting point. We haven’t spoken about it yet today. We’ve been talking about the trading business and how the trading works in the flow of the Glencore – the Xstrata commodities into the trading business and how we can blend and arbitrage opportunities et cetera.

But I think, totally obvious and simple what happens in the Glencore system that’s what we’ve always said and that we – even when we had Xstrata as our sister company or associate company whatever you want to call it, what was key – even though we didn’t control Xstrata, we didn’t had the 35%. We wanted to have input in their marketing, because whatever is in Glencore, we have this vast knowledge of what the markets are doing, we have an idea. So therefore we can guide the asset part of our business to sell at the correct prices.

Now we are not sitting there, I know a lot of the mining companies, say, we just have price taker and the market is the market and we’ll sell into the market at the price of the market. We got to try and understand the market and the read the market and sell at the right timed or fix pricing at the right time for the asset part of the business as well.

And as Tor says, I don’t know, it will come on in the results. When you look and compare the prices we obtained from our product as opposed to our peers and definitely on the coal side who just took the market price of the day. Alex?

Alex Beard

I think on the oil side again, the results, first half always was relatively positive – strong trading and some of the – marketing conditions were pretty good. Second half year, I think there is some patch in – some sort of global recovery and product demand in particular for gasoline has been a little bit week in the United States and that’s not been a particularly good sector.

On the freight side, again a bit of a patchy story, I think in market terms, the first half of the year, certainly the first quarter was stronger than people expected on some of the sectors in particular on that – the smaller, sort of the Panamax and the MR size sector on products was actually a better performance in global market terms than people thought.

The weaker ships were probably the larger the VLCC and the Suezmax.. Second half of the year, much the same I would say, very sector dependent. In terms of our exposure, I think our exposure is kind of rolling off as planned. So whilst it’s not small this year in terms of struggling with wet freight exposure, it’s definitely getting smaller or through the worst of it and I think, second half should be on plan I would think.

Steve Kalmin

Ag, well, clearly we are not happy with the results for the first half of the year. I can tell you I am not happy. Ag is notoriously lumpy though that we are somewhat hostage to the vagaries of the weather and I would say the first half of the year was categorized by a number of things not working.

First of all, we had poor crops in the FSU and therefore for the first half of the year, there was really nothing to move out of Russia or the Ukraine or Kazakhstan. We had no carry charges as a result of the tight old crop. We didn’t have much volatility because the market was pressured by what was expected to be and what has more or less turned out to be a large new crop.

We had logistics problems in South America, in Brazil, we had some specific issues in Argentina. We had poor crush margins in the EU. and again some specific crushing issues in Argentina and particularly with regard to our Newport and new crushing plant at Timbues. And so, it was just a bunch of things and I would say in terms of the outlook for the second half, as a start I would expect things to normalize.

The crops are of course better than last year. The markets look like they will be relatively well supplied although it has turned dry in the US in the last couple of weeks. We – at the moment, and when I say at the moment, in the last four or five weeks, remarkably – all the wheat and barley the price more or less where they should be, but that’s a very unusual situation.

So I think, for the second half of the year, things are likely to normalize and we just had a number of events all stacking up on each other and that will not be repeated. We have the – we still have the underlier of good demand growth, particularly on the oil and oil seed side.

We are making good progress with Viterra. Viterra, as Steve said was complicated. We had disposals to Richardson, to Agrium. The disposal of – the disposal from past business. We had corporate overhead to take out the closure of the office in Calgary and Vancouver.

We had to close down all of Viterra’s marketing business, international trading business, multiple offices and all of that will feed through the results of doing all of that will feed through in the second half. Quite how the second half will look in terms of the markets, I think will really depend on the weather prospects over the next four or five weeks. But, the second half will be better for sure.

Menno Sanderse – Morgan Stanley

Good morning it’s Menno Sanderse at Morgan Stanley. Two questions please, first on iron ore. It’s becoming a nicely scaled business now at 26 million tons annualized. But you alluded in the statement that it’s still not making much money. Can you give us some idea about what the size needs to be if iron ore trading…

Tor Peterson

It is not making much money.

Menno Sanderse – Morgan Stanley

Sort of – statement, at least more scale for it to become fully profitable.

Ivan Glasenberg

Its scale to become meaningful size and profitability within Glencore.

Menno Sanderse – Morgan Stanley

Okay, so it is profitable now?

Ivan Glasenberg


Tor Peterson

Yes, there are no businesses performing very well. The tonnage is growing. As you see the tonnage that we are picking up to it we’ll even get bigger if I look already going forward what they got for next year. So I know business is growing. It’s profitable, it’s having a very good year. And on the asset side, we’d actually intend to grow little.

We got the two projects which we inherited from Xstrata the Mauritania one and the one in Zanaga. Mauritania is very interesting. It fits into the Glencore type model where it’s a Brownfield type expansion. The government have the other reserve in the country where they are producing tonnage.

They have a rail on, they have got a port. They’ve got a very good port, the rail on has access facilities to allow us to go in rail on the port. It’s a large port recently built by Chinese. So it’s pretty good nice Brownfield expansion which we are busy doing the work on right now and that’s something that we will slowly develop in the Glencore type style.

We won’t do the big hit and go for the big mass of expansion, but slowly get to understand the country, ensure that the rail and the port works well and then we can work well with the government because they do run the rail on in the port. and we will expand this slowly over time. But it is greatly reserved, massive reserve, that can be developed, but doing it in our style, not the big bang philosophy and doing slowly we believe it’s something that can bode well for the future.

Ivan Glasenberg

Sorry, I mean the current was more with that increased scale that’s what’s kind of from a double-digit million with a triple-digit and that’s kind of the…

Menno Sanderse – Morgan Stanley

Perfect, and all it be – you feel that it’s a little bit dwarfed at the moment but you laid out a path of where you are going Chad, Cameroon. Can you give us some idea about the opportunities still ahead of and what type of CapEx is required to get there?

Ivan Glasenberg


Alex Beard

I think, we see good growth in the existing portfolio in Cameroon, good sort of in-field development in equatorial Guinea with continuing to develop Block O and Block I. Chad, I think is very interesting. I think there is a lot of potential there in Chad which we are only to starting to realize. I mean, there are lot of prospects and exploration ideas there in Chad and the blocks are very large in scale and size.

So I think Chad will be key element in the portfolio going forward. I mean, I don’t think we can – sort of specific CapEx numbers today, probably there will be more detail on the 10th of September. But in terms of opportunities, as Ivan mentioned earlier, we are always looking for opportunities that have good synergy with existing businesses.

We are looking at opportunities in other countries in Africa, potentially in South America as well. But I see, two or three good opportunities out there to add either organically growing our existing portfolio or potential M&A work as well.

Christopher La Femina - Jefferies & Co

Hey, it’s Chris La Femina from Jefferies. I have one question related to the macro environment and the more related to Glencore’s production cost. First on the macro environment. If we look at the last five or ten years in the sector there, it’s been pretty dramatic macro catalyst and over any 12 month period the world has typically changed a lot.

And now we are entering a period where you are going to have potentially tapering in the US, you are seeing treasury yields in the US go up a lot. There is reports now about some emerging economies having some new problems with the capital outflows et cetera. And because we have relationships with thousands of counterparties, I’m wondering if you are seeing yet any evidence of weakening demand or are counterparties that are more fearful about the – now and how rising interest rates may be affecting them.

Got some other question, the question about operating cost. I’m wondering if you look at your pro forma unit cost, particularly in coal and copper year-over-year. How they trended? I think some other mining companies reporting year-over-year unit cost reductions of between 5% and 10% in US dollars and I’m wondering that’s kind of your experience as well?

Ivan Glasenberg

Yeah, I think on the macro view, if you look at all of these ideas, how much we expect China to grow, it runs both the – is it really going to grow at 7.5% et cetera. China today does consume, we are seeing always – much of the focus on the rest of the world and what is happening, China does consume close to 40% to 50% of most of the world’s commodities.

So that is the key element where we see China growing and always look at the one view, it’s consumption per capita. Of these commodities, China as opposed to the rest of world, and that is very different. And the urbanization whether you believe it or not, are you going to urbanize 400 million people in China over the next, 7, 8 years?

These are the questions you got to ask, but you keep going to China and there is nothing that sort of changes my view that that is going to happen and the growth continues occur. And the other economies, as you say, India will talk and speak for coal, as India, yes, there is a problem today, if we talk about these issue rise, but India today is industrializing a lot quicker than people imagine.

I think coal has gone right from three years ago from about 40 million tons input up to about 150 million tons this year. So even you aim from about 17 last year to 150 this year, talking a 180 million tons next year that tells me what’s happening. They are building the power stations they are generating more electricity.

So you are going to get a certain amount of growth occurring in India. So, we don’t see it, I mean, you can go across the deck of guys sitting here, you haven’t spoken to the nickel, copper guys, what are they seeing on consumption.

Kenny Ives

On the nickel side, I think it’s much healthier than we saw in 2012. If you take China as, let’s say the main market for nickel demand growth over the past ten years, the growth you’ll see in 2013 is better than we’ve seen at any point since 2007. And if you look demand growth in China this year, we are expecting to see 11% plus on the nickel side. So if you take that reality of supply at across the globe, the nickel picture is extremely healthy, irrespective of what happens in Europe and/or elsewhere.

Telis Mistakidis

I mean, I just want to comment, what you said about bond yields, generally if you see high yields, it means the economy is stronger than before. People start to worry if they see long-term bond yields coming off, which is a weakness in the economy. So I guess, it’s a little bit, and if you want to put your bear head on you can turn around and make a bearish scenario whichever way you want to paint it.

Well, bond yields are – therefore it’s back, well actually it’s not. Generally, that’s a strength. And in fact, that’s what we’ve seen and if you see for the first, I would say eight months of this year, there has been a very bearish scenario painted in the commodities and people would tend to – paint copper, across copper it’s weakening demand and so on.

Now, if you go back and try and make a calculation of whether demand has been weak or strong or look at by demand, take the available stocks that are reported at the beginning of the year, January, be it this year, maybe LME stocks, the available stocks have the same today as they were eight months ago. They went up in March and then have been coming down again.

So the available material non-cash was about quarter of a million which is what it was at the beginning of the year. On COEX, it’s more than half, on SHFE, it’s gone down, it went up, the quarter of a million and down to 160,000 tons, but the real important thing is, what happened was that there was about a million tons of material sitting in bonded warehouse in Shanghai and today that’s gone from 1 million to 300,000.

So, actually, you’ve seen the deficit in excess of 600,000 tons in the copper market in the first eight months. So, no matter what how you want to paint it, how bearish it was, those are the numbers and you can go around and look and do your numbers. I don’t think there is any point in looking at making any assumptions and producing stocks and consuming stocks because they don’t have any.

So actually, if you look at the price actions it went up in January there was a big euphoria in terms of the US kind of not falling over the cliff. Copper prices rallied to above $8,000, it came down to below $7,000 and it’s now around $7300 despite the bearish yield.

So, whichever way you want to paint it, even if you say China is slowing down, I think what Ivan was alluding to a 7.5% growth on an 8.5 trillion the economy is better than the 10% growth in the $4 trillion economy which is where it was only seven years ago. So the numbers are very, very big. And mines don’t come three times the size as these become 15 years.

So, two things, one consumption is a lot better than people generally give a credit for purely because of the scale of people consuming today. China is consuming, India is consuming, you didn’t have that when Escondida was developed in 1995 you had US and Europe and that was half a billion people, today, you are better at zero to back of that in terms of – what’s the low consumption is.

So, yes, I would say, we think that people have maybe misinterpreted in terms of what the real situation has been, because we have seen deficit certainly in copper and in the numbers. And because of that, and if US and where we are seeing signs of growth, we haven’t really seen the pickup in demand, we are seeing the numbers coming in and we don’t dissipate now, housing begins to pick up and we haven’t built anything in the US for five years now.

And it’s timing to come. So, yeah, I mean, we think either markets have been a lot better than people have given credit for, and secondly we think as we move to the second half, relative to the first half, we’ll see an improvement.

Steve Kalmin

Chris, just on unit cost, I think that’s only to the 10th of September that will be a feature where we trending where we are savings, percentages, all that sort of stuff we will cover that.

Sylvain Brunet – BNP Paribas

Hi Sylvain Brunet from BNP Paribas. The first question I had was with banks now withdrawing more significantly from the commodity markets, would you say that it is opening a number of new opportunities for you? And I am thinking of beyond the iron ore, but things like LNG perhaps, so if you could talk a little bit about that?

Second question I had was in the all trading, was the contribution from Rosneft already significant in the first half? Is there any way you can help us with the numbers there? The last one was to get a bit more of color on the RC around your volume targets if you are confirming them and the discussions about the ban in cobalt is now behind us? Thank you.

Ivan Glasenberg

I didn’t get the last, I think most of it’s for you Alex.

Alex Beard

Yes, so, on the all trading side, I mean do we see an opportunity with banks leaving the market. I mean, most of the big banks who are well known to be commodity trading, so JP Morgan, Morgan Stanley, Goldman Sachs, had physical trading operations, but for a large extent they were derivative for paper waste and they were focused around sort of franchise flow of business from their customers offering hedging services, pricing services, that sorts of things.

So, in the physical market, if the banks are not there, there are certain gaps, I mean, JP Morgan certainly was bigger in the last three or four years and before. So there will be I think some opportunities around about supply deals around about refineries, crude supply and product off take connected with financing potentially that those banks have made a habit of doing that there may be more opportunities for trading companies.

But I don’t think the difference is going to be that large if those banks are fought after the business by whatever regulatory changes there. Specifically on LNG, I mean, LNG is a physical product, I mean, obviously it’s gas around, in fact, I think to our mind, LNG has more similarity with the oil market than it does with the gas market, because it allows you the possibility to put it on a ship to arbitrage between different markets.

Diversion rights and to a certain extent some kind of quality arbitrage as well whereas land base gas is pipeline based and it’s much more of a – as a financial derivative product which LNG is up towards more of the – sort of Morgan Stanley, Goldman Sachs model.

So LNG I think fits more naturally, more properly within a physical trading house than it does within a bank and that’s why we feel that the LNG market is now about to a scale and a size that is interesting for us to trade physically and that’s why we have an LNG team starting in September looking for those kind of physical LNG trading opportunities.

What was the second question?

Sylvain Brunet – BNP Paribas


Alex Beard

Rosneft, well, there are no numbers for Rosneft in the first half numbers here. The Rosneft transaction is obviously a huge transaction in terms of pre-finance very, very large numbers and large amounts of oil. But I think the one thing you do have to bear in mind is that the price structure with Rosneft is market-based. Rosneft is obviously a very large oil company, sells a lot of their oil by tender.

It’s very competitive, the off take under the pre-finance is related to back to that tender numbers. So it is a market number. Clearly having a scale and size and our position with Rosneft allows us to take a strong position in some of those markets and to integrate that within our existing trading book, but it isn’t a fantastically high margin business that comes as a result of having the pre-finance. So there are no numbers in the first half, I don’t think you’ll see a material change in oil trading numbers because of Rosneft in the second half.

Tor Peterson

ERC coming in on budget, yes in both Katanga and Mutanda are on the expansions at the time of budget and by the end of – by the fourth quarter this year, both will be at 200,000 tons annualized. That is the design capacity for Mutanda, 200,000 tons and Katanga by the end of next year should be at 270,000 tons. In Mutanda, we do have the possibility to expand by a further 80,000 tons by putting in a concentrator which we are thinking about.

There is a very shallow sulfide ore body there that we can mine. Put in a concentrator and ship that material across the board to Mapanga, Zambia. So that is something that we are evaluating and one that we should do that. It’s a quite – the kind of the thing that we like.

In terms of cobalt ban, and going, I think, it’s important to see what happens rather than what people say, there is a lot of it that’s lost in translation and most of it has to do with the fact that the authorities are trying to stop the artisanal mining which is not taxed. I mean that’s really the rule of transaction. We don’t want this stuff just being dug out of the ground and just shipped by – across we don’t tax it. We want to stop that, we want our – basically our resources to go through companies that are registered that pay tax and process through that, that’s really – I would say the underlying message that they are trying to come across.

Kenny Ives

If I can jump in there, when you talk about potential game changers, when you talk about bans, I think everybody in here is familiar with nickel pig iron or what nickel pig iron is and at the end of the day that’s premised of Indonesian ore flow to China and from January the 12, 2014, in theory a ban is ratified and a ban will come into force.

Not to put numbers on the same, but if the Indonesians actually deliver on the same, it is mining nickel at both side as copper that is copper concentration both Grasberg and (inaudible), forget about what PT& Co are doing in terms of net exports, forget what Antam are doing in the form of nickel exports that is 25% of the world production, originating in Indonesia and being processed in China. Even if you see disruption has the potential game changer for the nickel business we have.

Ivan Glasenberg

And that is an important point that Kenny rises and no one talks about if not, it is a parliamentary decree and Indonesia will stop exporting these raw materials, they will stop exporting nickel ore from 2014, they will stop exporting bauxite. And therefore they are trying to force the processing of these raw materials to be processed in their country.

Now how that law is going to be implemented? How quick? How hard? How fast? That’s the big question. But as Kenny said, these are game changers. If certainly nickel ore is limited it won't disappear I imagine, but they will have to do something to enforce more add-on value in Indonesia. And what they do, do with the bauxite exports that is going to affect eventually the nickel price, the aluminum price. So we got to watch that carefully.

I think that’s it. Thanks Paul. Thank you.

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