Glencore Xstrata to focus on fiscal discipline, portfolio

VANCOUVER — It was not always a smooth transition, but roughly 12 months after the announcement Glencore International has solidified a US$29-billion takeover bid for Xstrata, with the merged company trading as Glencore Xstrata (GLEN-L)...

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VANCOUVER — It was not always a smooth transition, but roughly 12 months after the announcement Glencore International has solidified a US$29-billion takeover bid for Xstrata, with the merged company trading as Glencore Xstrata (GLEN-L) and boasting a market capitalization totalling US$71 billion at the time of writing.

Glencore Xstrata is now the fourth-largest miner in terms of equity valuation, and boasts a combined commodity trading and mining house with 2013 production expected to clock in at roughly 1.4 million tonnes of copper, 120 million tonnes of thermal coal, and 1.4 million tonnes of zinc. On May 3 the company unveiled its new management team, which continues to be run by CEO Ivan Glansberg and features a myriad of Glencore veterans. And it seems likely Glencore will be looking to cut additional fat from the Xstrata side of the coin.

“We believe there is large value that could be added to our group, having the traders sitting alongside the production base and deciding at what levels we should be producing, where materials should be stored, and really getting the full benefit of that corporate structure that no other mining company has,” Glansberg commented during a conference call.

The company has already identified US$500 million in what it terms "cost-based synergies" on the trading side of its business, with US$450 million in savings stemming from "market optimization", with another US$50 million coming from related transport and logistics benefits. Glencore Xstrata's lean capital strategy will likely be well received in an industry that has experienced a bevy of cost overruns and capital shortages, as the company pledges to eliminate unnecessary bureaucracy and administrative duplication.

“The departments are reviewing it constantly, and yes we have identified other potential savings and I think here are more, but we cannot quantify that yet,” Glansberg added. “A good way to look at it, however, is that Xstrata itself was comfortable in saying they could cut US$300 million in respect of overhead. That gives you an idea of the low hanging fruit and when you get rid of these business units and corporate offices you could see something in excess of that.”

The cuts include the closing of Xstrata's corporate headquarters in Switzerland and England, which will allow the joint company to cut staffing costs and reduce its "management layers." Glencore Xstrata is also undertaking a series of asset reviews, with results expected during the third quarter. It seems highly likely that the combined company could look to shed assets moving forward as a way to preserve capital and sweeten returns for investors. Glansberg specifically cited current market conditions, and the need to adopt a "defensive stance" in regards to the company's portfolio.

“Being major investors ourselves we're very focused on those returns, and we have always said that we're focused more on near-term growth from brownfield operations.” he explained, saying that lowering the risk on development assets was paramount, and citing recent cost overruns with many greenfield development projects as detrimental to the industry.

“So following the merger we'll continue that way, looking at any ‘easy’ greenfield projects or mergers and acquisitions activity of existing operations whereby we do not have the big capital blowout risks we've experienced in the industry over the last couple of years,” he concluded.

Bank of Montreal Capital Market's analyst Tony Robson described Glencore Xstrata's message as "the words that markets current want to hear", specifically citing a commitment to portfolio simplification and cash returns to shareholders as positive outlooks going forward. Robson did, however, mention that Glencore Xstrata's shares appear relatively expensive, with the company needing to "deliver on its promises to maintain its high stock premium."

Robson bumped his stock rating to "outperform" following the company's post-merger conference call, and maintains a target price at [€]4.00. Glencore Xstrata was up roughly 5.8% at the time of writing, and closed at [€]3.35 on May 3.

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