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TABLE OF CONTENTS Sep 9 - 15, 2013 Volume 99 Number 30 - 0 comments

Glencore Xstrata latest to catch the writedown bug

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2013-09-04

Despite being one of the most well-diversified commodity companies in the world — with marketing, trading, mining, smelting and shipping assets in metals, oils and agriculture — Glencore Xstrata (LSE: GLEN) was unable to protect itself from the sting of falling metal prices.

The Swiss-based company is  writing down the value of its assets by US$7.7 billion at a time that revenues had been falling as well. 

Predictably, it was the mining part of its business that took the blame for the less-than-impressive results.

Still, relative to its mining-only peers, Glencore’s financial statements were a testament to the benefits of diversification, as revenues for first-half 2013, while down, were only off 2% compared to the same period last year.

The total dollar value of revenues for the first half was $121.4 billion, but despite such a robust figure, the writedowns ensured that the company reported a loss to the tune of US$8.9 billion.

The results were not only noteworthy for the loss, but also because they were the first financial statements released since Glencore International and Xstrata merged back in May. Unfortunately the occasion wasn’t marked by happier numbers, as metal prices were down 15% on average over the period.

The writedowns largely had to do with the former Xstrata assets, as Glencore had to clear all of the goodwill value that it assigned to Xstrata’s mines at the time of the merger.

While the company didn’t offer many details about the impairment charges, it is a safe bet that they were associated with the early stage and development projects — an example of which would be its expensive Koniambo nickel project in New Caledonia.

Another former Xstrata asset could be on its way out the door. The company has been trying to sell the Las Bambas copper mine in Peru, as the sale was a condition of Chinese authorities approving the merger. 

Glencore updated the market on the sale, saying it had been getting plenty of interest from Chinese firms and expects to have a deal done by year-end.

But Xstrata can’t take all of the blame for the impairment charges. Glencore had to take a US$452-million writedown the Murrin Murrin nickel laterite operation in Australia — an asset it held on its own before the merger.

Moving beyond such impairments, there was some positive news in the financial statements.

The first bit of good news is that the companies’ integration is yielding more synergies than expected. Glencore says that cost savings being realized are likely well above its previous guidance of US$500 million a year.

Another positive was increased copper and coal production, which did its part to soften the effects of weaker metal and coal prices.

And then there is the trading and marketing branch of the business — the business that made Glencore’s founder, the late Marc Rich, a famous or infamous man, depending on who you ask.

Glencore’s marketing arm managed to increase operating profits by 6% to $1.2 billion, with metal, oil and coal trading offsetting the weaker performance of its agricultural business.

Net earnings came to US$2 billion, excluding non-cash writedowns. 

While it’s an impressive figure to be sure, it’s still 39% less than what the company reported for the same period last year.

Despite being one of the most well-diversified commodity companies in the world — with marketing, trading, mining, smelting and shipping assets in metals, oils and agriculture — Glencore Xstrata (LSE: GLEN) was unable to protect itself from the sting of falling metal prices.

The Swiss-based company is  writing down the value of its assets by US$7.7 billion at a time that revenues had been falling as well. 

Predictably, it was the mining part of its business that took the blame for the less-than-impressive results.

Still, relative to its mining-only peers, Glencore’s financial statements were a testament to the benefits of diversification, as revenues for first-half 2013, while down, were only off 2% compared to the same period last year.

The total dollar value of revenues for the first half was $121.4 billion, but despite such a robust figure, the writedowns ensured that the company reported a loss to the tune of US$8.9 billion.

The results were not only noteworthy for the loss, but also because they were the first financial statements released since Glencore International and Xstrata merged back in May. Unfortunately the occasion wasn’t marked by happier numbers, as metal prices were down 15% on average over the period.

The writedowns largely had to do with the former Xstrata assets, as Glencore had to clear all of the goodwill value that it assigned to Xstrata’s mines at the time of the merger.

While the company didn’t offer many details about the impairment charges, it is a safe bet that they were associated with the early stage and development projects — an example of which would be its expensive Koniambo nickel project in New Caledonia.

Another former Xstrata asset could be on its way out the door. The company has been trying to sell the Las Bambas copper mine in Peru, as the sale was a condition of Chinese authorities approving the merger. 

Glencore updated the market on the sale, saying it had been getting plenty of interest from Chinese firms and expects to have a deal done by year-end.

But Xstrata can’t take all of the blame for the impairment charges. Glencore had to take a US$452-million writedown the Murrin Murrin nickel laterite operation in Australia — an asset it held on its own before the merger.

Moving beyond such impairments, there was some positive news in the financial statements.

The first bit of good news is that the companies’ integration is yielding more synergies than expected. Glencore says that cost savings being realized are likely well above its previous guidance of US$500 million a year.

Another positive was increased copper and coal production, which did its part to soften the effects of weaker metal and coal prices.

And then there is the trading and marketing branch of the business — the business that made Glencore’s founder, the late Marc Rich, a famous or infamous man, depending on who you ask.

Glencore’s marketing arm managed to increase operating profits by 6% to $1.2 billion, with metal, oil and coal trading offsetting the weaker performance of its agricultural business.

Net earnings came to US$2 billion, excluding non-cash writedowns. 

While it’s an impressive figure to be sure, it’s still 39% less than what the company reported for the same period last year.



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Photos

A truck hauls ore at Glencore Xstrata's Lomas Bayas open pit mine in Chile. Source: Glencore Xstrata
A truck hauls ore at Glencore Xstrata's Lomas Bayas ope...

Companies in This Story

Glencore Xstrata plc




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