By Stuart Burns
Glencore Xstrata’s (OTC:GLCNF) chief executive has come in for a lot of criticism following the $7.7 billion write-down of its mining assets. Ivan Glasenberg made the announcement on his first results call since the merger of mining giant Xstrata with commodities trader Glencore.
In hindsight, the deal can be seen to be anything but a merger of equals as it was presented between February 2012 when it was first mooted and May of this year when it completed. With the Xstrata board gone and Glencore’e executives in place, it was a takeover in all but name.
The write-down was explained as the difference between the $44 billion at which Glencore calculates it acquired Xstrata, and the $37 billion value it places on it now.
The write down has come about because of falling commodity prices and the mothballing of some of Xstrata’s greenfield projects. No one is suggesting, though, that Glencore’s veteran dealmaker Glasenberg could face the same fate as Rio Tinto’s CEO Tom Albanaese, who abruptly left the firm after announcing $14 billion of write-downs earlier this year. The truth is falling commodity prices have to be reflected in a mining company’s assets valuations and those assets are not worth what they were considered to be worth a year or two back.
A closer look at Glenstrata’s results supports this view.
Mining assets which were largely Xstrata’s have suffered the write-downs. According to the Telegraph, the group swung to a pre-tax loss of $9 billion for the half, down from a $2.1 billion profit a year earlier on a pro forma basis, comparing like with like. Ignoring one-offs, adjusted EBITDA were $6 billion, 9% down.
Glencore’s marketing (or commodity trading) business, on the other hand, did much better. Marketing EBIT was $1.2bn, up 6% on a year earlier, with metals and energy products “more than offsetting a slow start in agriculture,” according to the firm. Mining EBIT, however, was down 39% on a year earlier to $2bn, even though rising production offset falling prices to some extent.
It’s far too early to say if the merger was a good deal for Glencore or Xstrata shareholders – only time will tell – but the support that the trading side of the business is able to give the mining side in times of weak prices certainly gives the group an advantage over pure mining plays in the current market. The $500m of savings the merged firm expected to achieve is also said to be conservative; Glasenberg expects the eventual figure to be much higher.
Forecast for ‘Glenstrata’?
Past performance is no guarantee of future returns, as my fund manager caveats his offerings, and this applies as much to individuals as companies, but if I was a betting man, my money would be on Glasenberg to make this work in the longer term.
He and the Glencore management team have proved time and again they have the dealmaking skills and market experience that you just have to feel the combination of mining clout and marketing expertise will eventually give the merged firm an edge in the marketplace.
In that light, these write-downs should be seen as clearing the decks for future growth in a lower-price environment, not an admission of failure.