London, England — 11 September 2013 – Glencore Xstrata “’ one of the world’s largest global diversified natural resource companies “’ will cut costs, shelve 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 in 2014.
In an update on the US$46 billion tie-up four months after taking control, reports Fin24, Glencore Xstrata said there could be more cost savings and synergies ahead.
“We believe there is still more to come,” chief executive Ivan Glasenberg said in a presentation to investors, adding that these would be from both marketing and from savings at mines. The additional benefits would be clear in 6 months, he said.
“There is certain low-hanging fruit which is easy to capture, as we delve deeper into the assets … I am sure there is more to go – to pinpoint what that number is difficult.”
The commodities trader had promised US$500 million of synergies when the acquisition was first announced last year – largely from the benefit of channelling more of Xstrata’s metals and minerals through Glencore’s marketing machine.
The increase in the deal’s benefits was not unexpected given the conservative nature of Glencore’s original targets. Glencore’s shares were up 3.3% in London at 12:00 to almost 332 pence.
The shares have underperformed a volatile UK mining sector by around 7% since the merger was completed.
In the first day of presentations to show the success of the deal, Glencore said it now planned for synergies to exceed US$2 billion for 2014, of which US$450 million amounted to confirmed synergies in marketing, but to which Glencore added US$175 million from financing and US$1.4 billion through cost savings alone, more than many analysts had forecast.
Much of the savings 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 total – the largest slice – has come from the coal division, where Glencore, like other miners, is struggling with weak prices and oversupply. Glencore said almost a third of the world’s thermal coal production is loss-making, an "unsustainable" prospect.
Glencore’s coal division has made the steepest cost cuts so far, not least because of the pressure on margins from weaker prices. Productivity there has already improved by more than a fifth per employee, Glencore said.
It could also put more operations on hold, Glencore’s co-head of coal, Peter Freyberg said, adding that some mines were struggling and the group would not cross-subsidise.
Glencore Xstrata, which prides itself on a culture of cautious allocation of cash, plans to cut capital expenditure by US$3.5 billion by 2015, and to hold spending to sustain operations at US$4 billion, at the lower end of previous guidance.
Some of the cuts in copper, nickel and coal among others, will be channelled into oil, where Glencore sees higher returns.
Glencore also said it had cut Xstrata’s pipeline of greenfield projects – mines to be built from scratch that would have meant spending some US$21 billion. Out of a total of 88 Xstrata projects, 44 have been suspended and 7 cut back.
Glencore “’ which listed in London and Hong Kong in 2011 “’ went on to reveal that it now planned to apply for a secondary listing in Johannesburg, to begin trading before the end of the year.
The company had come under fire last month after it wrote US$7.7 billion off the value of Xstrata’s assets. This was a paper hit, but raised questions over the deal, sealed just as the commodity cycle turns.
Source: Fin24. For more information, click here.