Clara Ferreira-Marques London
Glencore 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 $2 billion (R20bn) next year.
In an update on the $46bn tie-up four months after taking control, 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 yesterday, adding that this would be from both marketing and savings at mines. The additional benefits would be clear in six months, he said.
“There is certain low-hanging fruit that 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 [is] difficult.”
The commodities trader had promised $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 have underperformed a volatile UK mining sector by around 7 percent since the merger completed.
In the first day of presentations to show the success of the deal, Glencore said it now planned for synergies to exceed $2bn for 2014, of which $450m amounted to confirmed synergies in marketing, but to which Glencore added $175m from financing and $1.4bn through cost savings alone, more than many analysts had forecast.
Much of the savings came from cutting corporate costs – Glencore has shut 33 offices in three months and cut almost half the Xstrata staff in headquarters or divisional offices.
But up to $576m of the total – the largest slice – has come from the coal division, where Glencore like other mining companies is struggling with weak prices and oversupply. Glencore said almost a third of the world’s thermal coal production was 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 had 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 $3.5bn by 2015 and hold spending to sustain operations at $4bn, at the lower end of previous guidance.
Some savings in copper, nickel, coal and others will be channelled into oil, where Glencore sees higher returns.
Glencore said a 25 percent stake in platinum producer Lonmin remained non-core, but there was “no rush” to sell.
The company said it had cut Xstrata’s pipeline of greenfield projects – new mines that would have meant spending about $21bn. Of Xstrata’s 88 projects, 44 have been suspended and seven cut back.
“We will first attack brownfields, those are the easy ones – but in 10, 15 years time we will run out of projects. Will we develop [greenfield projects]? We will be more pragmatic than others,” Glasenberg said.
Glencore, which listed in London and Hong Kong in 2011, said it planned to apply for a secondary listing in Johannesburg, to begin trading before the end of the year. – Reuters