Glencore Xstrata mining merger produces $2.4bn in synergies – by Jana Marais (Business Day Live – March 9, 2014)

GLENCORE Xstrata has done an “excellent” job in finding synergies through the mining giants’ $29bn merger in May 2013, the combined group’s first set of annual results shows.

Releasing the results this week, CEO Ivan Glasenberg said the group had increased the synergy benefits of the merger from the original estimate of $2bn a year by 2014 to $2.4bn, and there was scope for further cost savings.

Despite a $7.5bn write-down on the value of Glencore Xstrata assets since the takeover on May 2 last year, the merger was a good decision and the additional realised cost savings show Glencore has done an excellent job, said Hanré Rossouw, head of commodities for frontier and emerging markets at Investec Asset Management.

“Because it was an all-share deal, the impairment is really an accounting issue related to the share price movements since the date the transaction was finalised and the allocation of fair value to Xstrata assets. It is not a cash-flow item,” Mr Rossouw said.

In addition to finance and headcount savings — about 8,000 jobs have been shed across the global operations since the takeover — the Xstrata deal had improved the group’s cost position by moving it down the cost curve with higher quality assets, Mr Glasenberg said.

The Xstrata write-down contributed to the group’s loss of $7.4bn, down from a profit of $1bn in 2012. Revenue rose marginally to nearly $240bn, about 60% of South Africa’s gross domestic product (GDP).

The fortunes of Glencore Xstrata, which listed on the JSE in November to deepen its “relationship with South Africa” and to highlight its confidence in Africa as an investment destination, are tied to the copper and coal markets and its marketing division.

Its marketing business is seen as a big plus in diversifying its earnings, as its success is not closely tied to commodity prices.

The division “continues to be resilient no matter what movement we have in the commodity prices”, Mr Glasenberg told analysts.

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