Glencore First-Half Profit Falls as Commodity Prices Drop

Glencore International Plc CEO Ivan Glasenberg
Glencore International Plc Chief Executive Officer Ivan Glasenberg said, “Looking forward, we neither anticipate nor assume any material improvement in overall market or economic conditions in the near term.” Photographer: Simon Dawson/Bloomberg

Glencore International Plc, seeking to buy Xstrata Plc in a $30 billion deal, said first-half profit slumped 26 percent after prices for commodities fell.

Net income excluding exceptional items shrank to $1.8 billion from $2.4 billion a year earlier, the Baar, Switzerland-based company said today in a statement. That compares with the $1.6 billion average estimate of six analysts surveyed by Bloomberg. It declared a dividend of 5.4 cents a share.

Glencore joins Xstrata and Rio Tinto Group in posting lower earnings as commodity producers face the dual headwinds of rising costs and lower prices. Glencore is seeking to create the world’s fourth-biggest mining company with an all-share bid for Xstrata. Investors are due to vote on the deal on Sept. 7.

“Looking forward, we neither anticipate nor assume any material improvement in overall market or economic conditions in the near term,” Ivan Glasenberg, the 55-year-old chief executive officer and biggest shareholder, said in the statement. “We will continue to diligently look to our own growth pipeline and end markets to maximize performance for our shareholders.”

The companies agreed in February on a ratio of 2.8 Glencore shares for each of Xstrata’s, criticized by Qatar Holding LLC, Xstrata’s second-biggest investor, as too low.

Share Performance

Glencore, owner of 34 percent of Xstrata, rose 0.5 percent to close at 353.75 pence yesterday in London. Zug, Switzerland-based Xstrata slid 3.4 percent to 907.5 pence, a ratio of 2.57 Glencore shares and a discount of 8.4 percent to the offer.

That’s the widest since the deal was announced on Feb. 7, according to data compiled by Bloomberg, signaling a heightened risk of the bid failing. Qatar has said an offer of 3.25 shares would be “more appropriate.”

“Glencore so far has appeared adamant that current terms are generous and it has other growth options,” Myles Allsop, an analyst at UBS AG in London, wrote in a note yesterday, citing a 60 percent chance the deal may be voted down. “Xstrata also appeared defensive at its first-half results, reiterating its standalone investment case.”

This month, Xstrata reported a 33 percent decline in first-half profit to $1.94 billion after metals and coal prices fell, while Rio Tinto said net income dropped 22 percent. The Thompson Reuters/Jefferies CRB Index of raw materials averaged 13 percent lower in the period than a year earlier as waning economic growth in China sapped demand.

Cyclical Downturn

The “golden years” of Chinese economic growth are gone, Roberto Castello Branco, director of investor relations at Vale SA, said Aug. 14. Vale is the world’s second-biggest mining company. Xstrata CEO Mick Davis said Aug. 7 the company’s first-half result reflected a “cyclical downturn” in commodity prices.

The risk of Glencore’s takeover failing has increased as Qatar’s sovereign wealth fund continues to raise its holding in the mining company. The fund now owns almost 12 percent and spent about $5 billion building its stake from about 3 percent at the time the deal was agreed on in February.

Other shareholders including Knight Vinke Asset Management LLC and Standard Life Plc have also called for an increase in the bid. The transaction, which would create the world’s fourth-biggest mining company, can be blocked by just 16.48 percent of Xstrata holders under U.K. takeover rules because Glencore can’t vote its stake.

Accretive Deal

“Xstrata shareholders need to keep Glencore merger-bump expectations in check,” Jeff Largey, an analyst at Macquarie Group Ltd., wrote in an Aug. 17 report. “Our analysis reveals a meaningfully accretive deal for Xstrata shareholders, even at 2.8 times, and therefore dampens the bull-case argument for a large merger sweetener.”

Any increase in the offer probably wouldn’t exceed 2.9 to 3 Glencore shares, Largey said. Jefferies Group Inc. analysts Christopher Lafemina and Seth Rosenfeld said Aug. 1 that Glencore may announce a 3-share bid on releasing earnings.

Should the deal fail to complete, Xstrata can still generate “significant value,” CEO Davis said on an Aug. 7 call with analysts.

“The inherent capacity of Xstrata to generate value as a standalone company remains very, very powerful indeed,” even if the business model of the combined entity is “more powerful,” he said.

In backing Qatar’s push for a higher offer, New York-based investor Knight Vinke said Xstrata assets including the Antapaccay copper mine in Peru, the Koniambo nickel project in New Caledonia and the Collahuasi copper expansion in Chile are “not yet reflected in the valuation of the company.”

“They’ve just done quite a lot of investing in new production going forward,” Jane Coffey, head of equities at Royal London Asset Management, said in an Aug. 17 Bloomberg Television interview. “It was that production that’s coming on in two-to-three years’ time that is the foundation behind our belief that Glencore should pay more.”


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