Glencore squeezes US$2 billion out of Xstrata deal
Glencore will cut spending, shelve dozens of projects and squeeze more than expected from its record-breaking purchase of mining group Xstrata, lifting benefits from the deal to at least US$2 billion next year.
Commodities trader Glencore has been at pains to defend its US$46 billion takeover of Xstrata, a blockbuster for the mining sector that came just as the commodities cycle turned.
The increase in the deal’s headline benefits was expected, given Glencore’s conservative targets. But the company’s promise of more to come, plus a commitment to capital discipline in a sector that squandered billions during the mining boom was taken positively by the market.
The commodities trader had forecast US$500 million of synergies when the acquisition was first announced last year - but that included only the benefit of channelling more of Xstrata’s output through Glencore’s marketing machine.
In its first detailed presentation since closing the deal, Glencore said it now planned for synergies to exceed US$2 billion for next year, including marketing and financing benefits but also US$1.4 billion through cost savings alone, more than many analysts had forecast.
“As we delve deeper into the assets ... I am sure there is more to go - to pinpoint what that number is, is difficult,” Chief Executive Ivan Glasenberg said on Tuesday, adding the additional cuts would come from both trading and operations.
“We have to get mine managers to understand what Glencore needs, and how many people it needs to implement it. By the end of this year, we will have that in place.”
Glencore did not say how much it expected to squeeze from the next phase of cost saving and synergies, to be outlined in the next six months, though analysts at Sanford Bernstein said it could be as high as another US$1 billion.
Much of the savings so far came from cutting corporate costs - Glencore has closed 33 offices in three months and slashed almost half Xstrata staff in headquarters or divisional offices.
But up to US$576 million of the US$2 billion total - the largest slice of the current savings - has already come from the coal division, where Glencore like other miners is struggling with weak prices and oversupply. Glencore said almost a third of global thermal coal production is now loss-making.
Glencore’s coal division has made the steepest cost cuts so far, because of the pressure on margins from weaker prices. The group is now digging into other key divisions from copper to nickel. Productivity in coal has already improved by more than a fifth per employee, Glencore said.
It has put operations on hold and shut others, including the Wandoan project and the Collinsville mine in Australia, and more could be frozen, Glencore’s co-head of coal, Peter Freyberg said, adding the group would not “cross-subsidise”.
PROJECTS ON HOLD
Glencore Xstrata sees itself as a proponent of a new culture in mining that focuses on shareholder returns and careful spending. It plans to cut capital expenditure by US$3.5 billion by 2015 and hold spending to sustain operations at US$4 billion, at the lower end of previous guidance.
Much of that cut is due to Glencore’s assumption that it will sell the US$5.9 billion Las Bambas copper project next year, therefore removing what would be US$2.7 billion of spending.
Glencore also said some of its cuts in metals would be channelled into oil, where it sees higher returns.
The group has not been shy of criticising rivals for pursuing costly greenfield projects - mines built from scratch where cost overruns and delays have been rife. Its Koniambo nickel mine in New Caledonia, inherited from Xstrata, has seen costs escalate from under US$4 billion to US$6.3 billion.
Glencore said it had cut back an Xstrata project pipeline that would have cost some US$21 billion to build. Out of a total of 88 Xstrata projects, 44 have been suspended and 7 cut back.
“Will we develop (the greenfield projects)? We will be more pragmatic than others,” Glasenberg said.
Glencore gave little detail on sales and divestments, which include the Las Bambas mine in Peru, in which it expects first bids next week and Chinese suitors. It said a 25 per cent stake in platinum miner Lonmin remained non-core, though there was “no rush” to sell.
Glencore, which listed in London and Hong Kong in 2011, plans to apply for a secondary listing in Johannesburg, to begin trading before the end of the year.