Mining merger produces $2.4bn in synergies

GLENCOREXSTRATA has done an “excellent” job in finding synergies through the mining giants’ $29-billion merger in May 2013, the combined group’s first set of annual results shows.

Releasing the results this week, CEO Ivan Glasenberg said the group had increased the synergy benefits of the merger from the original estimate of $2-billion a year by 2014 to $2.4-billion, and there was scope for further cost savings.

Despite a $7.5-billion write-down on the value of GlencoreXstrata assets since the takeover on May 2 last year, the merger was a good decision and the additional realised cost savings show Glencore has done an excellent job, said Hanré Rossouw, head of commodities for frontier and emerging markets at Investec Asset Management.

“Because it was an all-share deal, the impairment is really an accounting issue related to the share price movements since the date the transaction was finalised and the allocation of fair value to Xstrata assets. It is not a cash-flow item,” Rossouw said.

In addition to finance and headcount savings — about 8 000 jobs have been shed across the global operations since the takeover — the Xstrata deal had improved the group’s cost position by moving it down the cost curve with higher quality assets, Glasenberg said.

The Xstrata write-down contributed to the group’s loss of $7.4-billion, down from a profit of $1-billion in 2012. Revenue rose marginally to nearly $240-billion, about 60% of South Africa’s gross domestic product (GDP).

The fortunes of GlencoreXstrata, which listed on the JSE in November to deepen its “relationship with South Africa” and to highlight its confidence in Africa as an investment destination, are tied to the copper and coal markets and its marketing division.

Its marketing business is seen as a big plus in diversifying its earnings, as its success is not closely tied to commodity prices.

The division “continues to be resilient no matter what movement we have in the commodity prices”, Glasenberg told analysts.

In 2012, it bought Canada’s Viterra, a major grain-handling business. The acquisitions of Xstrata and Viterra provide a “step change in marketing scale and profitability”, GlencoreXstrata said.

Other major mining companies, including BHP Billiton and Anglo American, started building their own marketing arms in recent years, but nowhere near the scale of GlencoreXstrata’s, said Rossouw.

It is also the only major diversified miner with no exposure to iron ore, whose outlook is less rosy, he said.

Glencore is forecasting supply deficits in the copper market beyond 2015 while it expects demand for coal to “remain solid in key regions amid high gas prices and a recovering global economy”.

Glencore remains bullish on the

Coal remains the prime choice to fuel economic growth in Asia. It remains the lowest cost fuel source for industrialising economies

outlook for coal, despite its forecasts that the market will remain oversupplied in the near term.

“Coal remains the prime choice to fuel economic growth in Asia. It remains the lowest cost fuel source for industrialising economies,” it said.

Two of its seven major growth projects set for commissioning this year are coal projects in South Africa. These include Wonderfontein, which will add 2.7 million tons a year of export coal, and Tweefontein, a $1.1-billion expansion of existing operations, which will produce seven million tons a year. Of this, 75% will be exported and 25% supplied to the domestic market when the project is fully operational by 2015.

Glencore increased its dividend 5%, bringing the total for the year to $0.165 a share.