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Glencore Xstrata latest to catch the write-down bug

Even being a super heavyweight in the commodities business couldn’t protect Glencore Xstrata (LON: GLEN) from the write-down virus currently making its way through the mining industry.


Even being a super heavyweight in the commodities business couldn’t protect Glencore Xstrata (LON: GLEN) from the write-down virus currently making its way through the mining industry.

Despite being one of the most well diversified commodity companies in the world, with marketing, trading, mining, smelting and shipping assets in metals, oils and agriculture, Glencore was unable to protect itself from the sting of falling metals prices.

The Swiss-based company said it had to write down the value of its assets by US$7.7 billion at a time when revenues are falling as well.

Predictably it was the mining part of its business that took the blame for the less than impressive results.

Still, relative to its mining-only peers, Glencore’s financial statements were a testament to the benefits of diversification as revenues for the first half of the year, while down, were only off 2% compared to the same period last year.

The total dollar value of those revenues for the first half of the year was $121.4 billion, but despite such a robust figure the write-downs ensured that the company still had to report a loss to the tune of $8.9 billion.

The results were not only noteworthy for the loss, but also because they were the first financial statements released since the Glencore and Xstrata merger was completed back in May.

Unfortunately the occasion wasn’t marked by happier numbers, as metal prices were down 15% on average over the reporting period.

The write-downs largely had to do with the former Xstrata assets as Glencore had to clear all of the goodwill value that it assigned to Xstrata’s mines at the time of the merger.

While the company didn’t offer many details on the specifics of those impairment charges, it is a safe bet that they were associated with the early stage and development projects — a prime example of which would be its expensive Koniambo nickel project in New Caledonia.

Another former Xstrata asset could soon be on the way out the door. The company has been in the process of trying to sell the Las Bambas copper mine in Peru. The sale was a condition of Chinese authorities approving the Glencore and Xstrata merger. Glencore updated the market on the sale saying it was getting plenty of interest from Chinese firms and expects to have a deal done by the end of the year.

Not that the Xstrata assets were the only culprit. Glencore had to take a $452 million write-down the Murrin Murrin nickel operation in Australia — an asset it held on its own before the merger.

With the bad news out of the way the focus can shift to the good of the first half of the year.

The first positive is that the integration process the two companies have been undergoing is yielding more synergies than original expected. Glencore says that cost savings being realized are likely to be well above likely its previous guidance of US$500 million a year.

Another positive was increased copper and coal production, which did its part to soften the effects of weaker metal and coal prices.

And then there is the trading and marketing branch of the business — the business that made Glencore’s founder, the late Marc Rich, a famous or infamous man, depending on who you ask.

Glencore’s marketing arm managed to increase operating profits by 6% to $1.2 billion with metals, oil and coal trading profits offsetting weaker performance of its agricultural business.

The end result was net earnings of roughly US$2 billion when the non-cash write-downs are excluded. While an impressive figure to be sure it is still 39% less than what it reported for the same period last year.

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