London - Glencore Xstrata took a $7.7 billion (R78bn) hit on Xstrata’s mining assets yesterday, drastically reducing the value of early stage projects after falling prices dragged down first-half profit.
The mining industry has been pummelled by billions of dollars in write-downs since the start of the year, with cooling prices and demand prospects denting the value of projects.
Glencore had been expected to follow suit once it completed the acquisition of Xstrata, and in its first post-takeover results yesterday it announced the figure alongside a 9 percent drop in core profit.
In absorbing the impact of a drop in commodity prices during the time it took to close the marathon deal, Glencore wiped out all the goodwill value it had allocated to Xstrata’s mines at the time of the merger.
“We just had to value the business with a blank sheet of paper,” chief financial officer Steven Kalmin said. “There are clearly areas where we have taken a fairly conservative approach to value in the current environment, including the greenfield, early stage projects in which Xstrata had committed spending.”
Glencore did not break down the impairment, but much of the hit is expected to be down to mines built from scratch that have been unpopular with Glencore management. These include the $5bn Koniambo nickel operation in the Pacific archipelago of New Caledonia.
“The magnitude of impairments sits at the top end of market expectations and will undoubtedly grab some headlines, although the market will have anticipated a wiping clean of the slate,” Liberum analyst Ash Lazenby said.
Glencore was not immune to falling nickel prices, though, as it took a $452 million hit on its legacy Murrin Murrin operation in Australia. Nickel is trading at almost a quarter of pre-crisis highs hit in 2007.
Glencore’s management has been reviewing Xstrata’s assets over the past three months.
Asset sales are expected to come out of that review, but chief executive Ivan Glasenberg is in no rush to sell. “Our major focus is bringing down the cost,” he said yesterday.
Glencore has flagged the start of a sale process for Peruvian copper mine Las Bambas, as demanded by Chinese regulators, and Glasenberg said interest in the asset was “strong”.
Glencore was hit by weaker prices in the first half and adjusted core profit fell 9 percent to $6bn, at the higher end of estimates. Net earnings fell 39 percent to just over $2bn.
Glencore completed its takeover of Xstrata in May. It said progress on the integration was exceeding expectations, with achievable cost savings likely to be “materially in excess” of previous guidance of $500m a year. It would update the market on the integration on September 10. – Reuters