Glencore posts massive Xstrata write-down

NEWLY formed Glencore Xstrata has posted a first-half loss of $US8.9 billion ($A9.8 billion), mainly due to a goodwill impairment of $7.6 billion on the acquisition of Xstrata in May.
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Underground at Xstrata's Newlands mine in Queensland.

Kristie Batten

The company said the statutory day one goodwill impairment reflected the broader negative mining industry climate and sentiment that prevailed during the first half of this year, as well as the heightened risks associated with greenfield and large-scale expansion projects.

A revaluation of the previously held interests in Xstrata also led to a $1.1 billion loss, while merger costs added around $130 million in additional losses.

A $452 million impairment was recognised on the Murrin Murrin nickel mine in Western Australia due to nickel price weakness.

In a morning note analysts from SP Angel in London said the value gained from the Xstrata buy should outweigh the write-downs but they expected more in the second half.

Meanwhile, income before significant items of $10.1 billion was $1.2 billion, down 34%.

Revenue was $112 billion, while earnings before interest, tax, depreciation and amortisation were $3.6 billion.

The company said little synergy benefits had been recognised yet from the Xstrata deal but it flagged previously forecast savings of $500 million per annum to be materially higher.

"The first half of 2013 has been a transformational period for Glencore,” Glencore CEO Ivan Glasenberg said.

“We completed the merger with Xstrata and have made excellent progress integrating the businesses.

“The synergies/cost savings from the merger will be materially in excess of previous guidance, based on timely preparation and decisive action.

“As we look ahead, we remain focused on the disciplined allocation of capital as well as robustly scrutinising all pre-existing capital plans of the enlarged entity.”

SP Angel said the integration seemed to be going smoothly.

“This is a massive task for any organisation and is particularly daunting for a business founded on commodity trading,” it said.

“We expect the combination of Xstrata’s mines to boost returns within the core marketing division but there will inevitably be casualties in the form of write-downs for mines which fail to perform within the new group.

“The challenge for Glencore is to adjust its management style to inspire Xstrata’s mine managers to perform as well as they have done under Mick Davis’ leadership at Xstrata.”

The company said its September 10 investment day would provide more details on the portfolio review and cost savings as it worked to define its core assets.

“We expect Glencore to push ahead with some $6-8 billion of disposals this year,” SP Angel said.

“It’s not a great market to sell assets into but we do expect significant sales to offset future impairments.”

The company had net debt of $34.8 billion and more than $13.6 billion of committed available liquidity.

Glencore declared an interim dividend of 5.4c per share.

Shares in Glencore fell 1.6% in London overnight.

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