Trading Cushions Glencore's 2012 Profit Drop
A rise in profits from trading helped Glencore (GLEN.L) offset lower prices in 2012, with net income down by a quarter as the commodities group prepares to seal a $34 billion takeover of miner Xstrata (XTA.L).
The headline drop, modest relative to a bruised sector, was a vindication for former trader and Glencore boss Ivan Glasenberg, who has long extolled the marketing arm's ability to grow in tough conditions. Trading growth, though, came largely from agricultural products, rather than mainstays coal and oil.
Glasenberg's pronouncements on the strategy of the combined trading and mining giant have been keenly awaited and he said on Tuesday that he was optimistic the group would soon see a green light from Chinese regulators, the last remaining hurdle.
But he gave away few specifics on his plans for the merged group, sticking with what he said was a focus on investor returns and an intention to grow the proportion of profit coming from marketing, a slice which will shrink to roughly 30 percent immediately after the deal completes.
"(Incoming Rio Tinto Chief Executive) Sam Walsh said at the Rio presentation that they are now going to act like owners. We don't need to act like owners, we are owners," he told analysts.
That means, Glasenberg said, an opportunistic approach to deals, from a marketing agreement and share purchase in unlisted Brazilian iron ore producer Ferrous last week, to a bumper oil funding deal with Russia's Rosneft.
It also means taking advantage of the travails of large diversified players, who are under scrutiny from shareholders as boom-time acquisitions sour, placing more assets on the block.
"Those opportunities will be there, that is something new in the industry," Glasenberg said. "Competition will be less fierce than before. A lot of the mining companies are reassessing their portfolios, they are hanging back, there are new CEOs and, like all of us, they are under pressure from investors."
Glasenberg said he expects to review the combined portfolio of projects. "Greenfield" projects, or those built from scratch, unlikely to find favor as the Glencore team proclaimed itself "afraid" of potential delays and excessive spending.
Glencore has been expected to mothball or jettison many of Xstrata's greenfield growth assets, including some in tough jurisdictions such as Argentina. More advanced greenfield projects like copper mine Las Bambas in Peru and nickel mine Koniambo in New Caledonia could remain.
Glasenberg's review has already caused friction between the two management teams, long-time rivals and soon-to-be partners.
Glencore's boss, however, was sanguine on the potential effects, saying his focus was on the managers at the mines, not middle managers. The comments are likely to fuel speculation over the departure of Xstrata divisional bosses, including its head of copper, Charlie Sartain. Glasenberg declined to comment.
"Immediately after the merger, you will see a structure in place, ideally the way Glencore would like it," he said.
He said big deals were not off the agenda for the group, which snapped up both Xstrata and grain handler Viterra in 2012, though regulatory clearances could be expected to take longer.
This could include iron ore, where Glasenberg said he would review operations put up for sale by Rio.
WRITEDOWNS, DIVIDENDS UP
Glencore and Xstrata shares rose on Tuesday, as both met or exceeded market forecasts, dividends ticked higher and the sector recouped losses. Glencore was up 3.4 percent and Xstrata up 4.32 percent, outperforming a 2.3 percent rise in the broader sector .FTNMX1770, around 1300 GMT.
Neither, though, was immune to the impact of falling commodity prices last year.
Glencore's 2012 net income fell to $3.06 billion, in line with expectations. That excluded the impact of an impairment relating to a reclassification of its holding in Russian aluminum producer RUSAL (0486.HK) after losses.
Its adjusted operating profit, or earnings before interest and tax (EBIT), dropped 17 percent, with a 27 percent drop in Glencore's industrial division accounting for the bulk of the weakness. Its trading division saw profit rise 11 percent, helped by a jump in earnings from oilseeds and grain.
Xstrata, reporting separately from Glencore for what should be the last time before the two merge, beat expectations but wrote down the value of nickel, zinc and platinum assets which dragged its net profit almost 80 percent lower.
The writedowns included a $978 million hit as Xstrata wrote down assets including its Australian nickel operations and platinum, and also $840 million on its investment in troubled South African platinum miner Lonmin.
Excluding the writedown, its profit dropped 37 percent.
Glencore expects to complete the Xstrata merger by April 16.