Glencore CEO Seeks to Win Over Investors With Dividends

Glencore Xstrata Plc wants to win over investors in the newly combined group with plans to study special dividends and share buybacks after completing a deal that creates the biggest zinc producer and steam-coal exporter.

“We are all shareholders in this company, we don’t want our money wasted on the building of assets or the buying of assets that don’t give a good return,” Chief Executive Officer Ivan Glasenberg said today in a phone interview. “If we can’t find anything that really gives good returns to this company, then yes, let the company get smaller. If the asset is depleting, let it deplete, let cash be generated in this company, then either do share buybacks or kick out dividends.”

The $29 billion acquisition by Glencore of Xstrata Plc establishes the world’s fourth-biggest miner with a market value of about $70 billion. The company would have reported net income of $2.2 billion last year, based on pro-forma figures released today.

Glencore management own 25 percent of the group and the company paid $1.1 billion in dividends last year. Glasenberg, who owns 8.3 percent of the combined group, reaped a $173 million dividend for 2012.

“Investors would be incredibly happy with any company that is actually now talking about returns of capital post the end of the organic growth phase,” Paul Gait, a mining analyst at Sanford C. Bernstein Ltd., said today by phone. “So they’ve invested, they’ve sown the seeds, now let’s reap the harvest. What investors have no patience for is companies that are continuing to try and sow when the weather’s changed.”

Glencore Xstrata started trading in London today. The stock gained 3.9 percent to close at 343.95 pence. The price of copper on the London Metal Exchange surged 6 percent to $7,263 a ton at the same time, its biggest one-day gain in 17 months.

Immediate Impact

The company plans to supplement its normal dividend payments with special returns to shareholders, it said on its website. Share buybacks will also be considered as they have “immediate impact and zero execution risk,” Glencore said.

“If we get to a point where we’ve got the right metrics, then everything else we’ll give back to shareholders,” Chief Financial Officer Steven Kalmin said in an interview. “That is, I think, their expectation and rightly so.”

Glencore may be able to pay a special dividend as early as 2014, Gait said. The company may return funds to investors from the planned sale of its Las Bambas copper project, which could yield as much as $10 billion, he said.

The combined group has interests in about 35 coal mines in Colombia, Africa and Australia, accounting for about 10 percent of global seaborne supplies of the fuel. The Baar, Switzerland-based company will be the fourth-biggest producer of mined copper and third-largest in nickel. It will employ about 190,000 people in more than 50 countries across its industrial and trading divisions.

Commodity Demand

“The key long-term drivers of commodity growth remain solidly in place, driven principally by the desire for improving living standards in emerging markets,” Glasenberg wrote yesterday in a letter to employees.

The combined group sees capital spending on new projects totaling $29 billion over the next three years. After 2015, spending is expected to “materially decline” to $4 billion to $5 billion, it said.

The takeover of Xstrata was completed almost two years after Glencore’s $10 billion initial public offering that ended more than three decades of it operating as a closely held company.

Exceed Target

Glasenberg told analysts today he expects to generate synergies “well above” the stated target of $500 million a year. He plans to close Xstrata’s Zug and London offices, and plans regional office centers in Sydney, Johannesburg, Toronto, Stamford and Singapore.

The group may save $150 million a year by eliminating Xstrata’s London office, Credit Suisse Group AG analysts said. They estimate possible costs savings a $1 billion a year by


The Xstrata acquisition will reduce the trading arm’s contribution to earnings to 28 percent from 63 percent, Deutsche Bank AG analysts Rob Clifford and Grant Sporre wrote yesterday in a report. The copper and coal divisions will be the biggest contributors to profit this year, according to Deutsche Bank.

The company will study so-called bolt-on acquisitions and will always look at “opportunistic” deals, Glasenberg said today in the interview.

“Could it do something major right now?,” he said. “No. I think we are stretched in what we have got to do and we’ve got to focus on that first. Later on, when we get some of this stuff under our belt, we will always look at any opportunities that come.”

Austerity Age

Glasenberg “has set the tone for the new ‘age of austerity’ for miners,” Bank of America Merrill Lynch analysts Jason Fairclough and Peter O’Connor wrote in a note today. “In our view, his firm embodies the culture of owner-managers that other CEOs may seek to emulate.”

Glencore last month cleared the final regulatory hurdle in a 15-month battle to complete a transaction that will see a number of senior Xstrata executives depart. Glencore will start notifying managers of job losses following yesterday’s completion of the deal, according to the letter from Glasenberg.

“By restructuring and refocusing, we will be better able to take advantage of the opportunities that will inevitably present themselves over the coming years to the benefit of all,” Glasenberg wrote.

The company has retained two former Xstrata executives as division heads among its 14 senior managers amid the departure of a number of Xstrata’s team.

Leaner Structure

“We expect Glencore senior management to dominate the new board and we expect them to impose Glencore’s leaner corporate structure,” Credit Suisse analysts Liam Fitzpatrick, Michael Shillaker and James Gurry wrote in a report. The new company could cut duplication and management costs by $200 million to $300 million a year at copper, coal and zinc units, they said.

Xstrata’s Peter Freyberg, who headed the acquired company’s coal unit, will run the coal mining operations of the group, with Tor Peterson continuing to lead coal trading, it said today on its website. Mark Eames, who was chief operating officer of Xstrata’s iron ore division, will lead the new company’s iron ore mining unit.

Telis Mistakidis, Glencore’s head of copper, will lead both trading and mining of the metal in the new company. Former Minara Resources Ltd. CEO Peter Johnston will head the nickel mining business. Peter Coates, who steps down as chairman of Australian oil and gas producer Santos on May 9, is asset integration adviser.

Glencore was advised by Citigroup Inc. and Morgan Stanley. Xstrata hired Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.

(Updates with closing share price in sixth paragraph.)
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