How ironic that Glencore’s trading arm mitigated the downturn in the commodity cycle just as the Swiss group’s mammoth merger with Xstrata looks to be in sight. Yesterday, Glencore reported a 25 per cent fall in 2012 underlying net income to $3.1bn while Xstrata suffered a 37 per cent fall to $3.7bn. Based on 2012 results at least, Xstrata shareholders seem to be getting a far better deal than the merger terms imply.
While Chinese regulators are the last to approve the merger, Glencore boss Ivan Glasenberg is confident it will go through. After all, Beijing has approved Glencore’s acquisition of Viterra, despite the grain handler’s hold over food markets – a sensitive subject in China. The deadline has been pushed to mid-April to give Beijing time to make up its mind. Already a year on since the merger was first touted, Glencore may yet have to make concessions to get it done. Still, rising hopes were enough to push up Glencore and Xstrata’s shares by 6 per cent and 7 per cent respectively yesterday.
The share price moves suggest that investors are also crunching the synergy numbers. No more details were given yesterday – so far only $500m in savings on earnings before interest, tax, depreciation and amortisation are being talked of. Yet despite the weaker performance in its mining arm versus its trading division, the company is still a solid miner. The 27 per cent fall in adjusted earnings before interest and tax from the mining arm compared favourably with the two-fifths fall in underlying earnings at Rio Tinto and BHP Billiton, for example. Copper production at Mutanda was up 37 per cent. And writedowns were also far less severe. Glencore’s $1.7bn impairment charge did not come near to Rio’s $14bn in writedowns last year. Hopefully that bodes well, as Glencore’s next role is extracting value from Xstrata’s assets.