Glencore Posts $7.7 Billion Writedown as Profit Declines

Glencore Xstrata Plc’s first-half profit slid 39 percent and the world’s biggest exporter of power station coal wrote down the value of assets acquired in the Xstrata Plc takeover three months ago by $7.7 billion.

Adjusted net income fell to $2.04 billion from $3.36 billion a year earlier, Glencore said today in a statement. That compares with the $1.87 billion average estimate of six analysts surveyed by Bloomberg. The Baar, Switzerland-based company reported a net loss of $8.9 billion.

The $29 billion all-share purchase of Xstrata created the fourth-biggest miner and added coal, nickel, zinc and copper output to Glencore’s global commodity trading empire. BHP Billiton Ltd., Rio Tinto Group and Glencore are among producers cutting costs, selling assets and reducing spending as lower prices trim profits and force more than $60 billion of industry writedowns.

The Xstrata impairments reflect “the broader negative mining industry environment and sentiment which prevailed during the first half of 2013 and the heightened risks associated with greenfield and large-scale expansion projects,” Glencore said in the statement.

“A lot of the greenfield assets and certain assets which they had on their books we didn’t put a large amount of value on,” Chief Executive Officer Ivan Glasenberg said in a phone interview from London today.

Industry Writedowns

The first half showed “tentative signs that we may be entering a period of increased capital discipline within the sector,” Glasenberg said in the statement.

Rio Tinto posted a $14 billion writedown in January on previous acquisitions of aluminum assets from Alcan Inc. in 2007 and coal projects in Mozambique. Gold companies, led by the world’s biggest, Barrick Gold Corp., have written down the value of mines by at least $26 billion in the past two months.

Some investors may find the figure on the Xstrata writedown “somewhat jarring, especially given management rhetoric on capital allocation,” Bank of America Merrill Lynch analyst Jason Fairclough wrote today in a note to clients.

Glencore fell 1.6 percent in London trading to close at 297.15 pence. The company, 25 percent owned by management, reported an interim dividend of 5.4 cents a share.

Glencore also posted a $1.2 billion accounting loss on revaluing its 34 percent interest in Xstrata at the time the transaction was completed, as well as a $452 million impairment charge at its Murrin Murrin nickel operation in Australia and a $324 million charge on its investment in United Co. Rusal.

Metal Prices

Declining metal prices, which averaged 15 percent lower in the first-half, were cushioned by increased production in coal and copper, Glencore said today. The company’s marketing unit “still performed very well” amid the drop in prices, Glasenberg said.

The Xstrata takeover is expected to generate annual cost savings “well above” the stated $500 million plan, Glasenberg, 56, said in May. It will be “materially in excess of previous guidance,” he said today.

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. It’s the fourth-biggest producer of mined copper and third-largest in nickel. It employs about 190,000 people in more than 50 countries across its industrial and trading divisions.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director of Glencore Xstrata.

Before it's here, it's on the Bloomberg Terminal.