Glencore Xstrata Plunges to Loss on Merger WriteDowns

Glencore Xstrata Plunges to Loss on Merger Write-Downs

"We completed the merger with Xstrata and have made excellent progress integrating the businesses," CEO Ivan Glasenberg insisted, stressing that the benefits and economies of the merger would be much greater than the initial forecast of $500 million per year.

ZURICH -- Mining giant Glencore Xstrata (IW 1000/11) reported today that it has plunged deep into the red, but the company defended its long-delayed merger three months ago, saying that cost savings would be higher than expected.

During the first half of the year, the new company posted a net loss of $8.9 billion owing to merger write-downs.

The group's shares have fallen by 11% since the merger.

Despite the dramatic switch from the $2.2 billion net profit the business made a year earlier on a comparable asset base, Glencore Xstrata said it expected to pay an interim dividend and said merger benefits would be bigger than expected.

"We continue to work tirelessly and diligently to maximize returns on our capital and to our shareholders," Glencore Xstrata CEO Ivan Glasenberg said in the earnings statement, describing the first half of 2013 as "a transformational period" for the company.

Publishing its first results since the merger, the new group took a charge of $7.6 billion to write down goodwill, meaning intangible assets that have a lower book value than the value at which they changed hands.

The group, based in Baar in northern Switzerland, also revalued Glencore's 34% holding in Xstrata before the merger, adding another $1.1 billion charge to its balance sheet, bringing its total write-down to $7.7 billion.

It also saw nearly $800 million evaporate from the value of its activities in the Australian Murrin Murrin nickel mine and its share in Russian aluminium giant UC Rusal.

The company meanwhile said the write-downs reflected the poor outlook for the mining industry and increased risks for big expansion projects and for the development of new sites.

Glencore Xstrata also saw its gross operating profit shrink 9% to $6.0 billion, as commodities prices tanked during the first half of the year, with metals prices falling a full 15%.

But the company's sales before interest and taxes nonetheless rose on a comparable basis by 4% to $112 billion, it said.

However, on a pro forma basis, presented as though the merger had taken place a year earlier and not including the restructuring costs, sales fell by 2% to $121 billion.

CEO Stays Positive

Glasenberg, who previously headed Glencore, remained sanguine about the group's performance.

"We completed the merger with Xstrata and have made excellent progress integrating the businesses," Glasenberg insisted, stressing that the benefits and economies of the merger would be much greater than the initial forecast of $500 million per year.

"As we look ahead, we remain focused on the disciplined allocation of capital as well as robustly scrutinizing all pre-existing capital plans of the enlarged entity," he added.

The group said that it expected to pay an interim dividend of $0.054 per share.

It said that this was a sign of its confidence in its prospects and in the strength and flexibility of its balance sheet.

But analyst Mike McCudden of online brokerage Interactive Investor was not convinced.

"The huge write-down of Xstrata's assets amidst a tough market, while they seek some stability in the board, is doing nothing to instill any confidence from investors," McCudden said.

"Glencore still has a lot of work to do in integrating Xstrata, and after a run of disappointments recently, today's attempts to reassure investors will do little to stop them heading for the exits," he added.

Ute Haibach, an analyst with J. Safra Sarasin, meanwhile said that while observers had expected to see write-downs, the ones announced on Tuesday "look high at the first glance."

Glencore Xstrata shares closed down 1.6% to 297.15 pence on the London Stock Exchange, where the FTSE 100 index of leading shares ended 0.2% lower.

The share began life at about 331.15 pence on May 3, and has since fallen by about 11.3%.

The long-awaited merger between Swiss commodities trader Glencore and mining giant Xstrata, which is also based in the Alpine country, came on May 2.

The new group took the stage alongside leading global commodities companies such as BHP Billiton, Vale and Rio Tinto.

Copyright Agence France-Presse, 2013

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