LONDON, Aug 20 (Reuters) – Glencore Xstrata took a $7.7 billion hit on Xstrata’s mining assets on Tuesday, 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 writedowns since the start of the year, with cooling prices and demand prospects denting the value of mining projects.
Glencore had been expected to follow suit once it completed the acquisition of Xstrata, and in its first post-takeover results on Tuesday 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 takeover, Glencore wiped out all the goodwill value it had provisionally 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 early-stage projects and greenfield operations, mines built from scratch which have long been unpopular with Glencore management. These include the $5 billion nickel operation Koniambo in 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 itself 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 had been reviewing Xstrata’s assets as owners over the past three months.
Asset sales are also expected to come out of that review, though Chief Executive Ivan Glasenberg is in no rush to sell. “Our major focus now is bringing down the cost,” he said.
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