Glencore Boosts Xstrata Cost Savings Estimate to $2 Billion

Glencore Xstrata Plc, the global commodity trader and metals producer run by billionaire Ivan Glasenberg, raised its estimate of savings from the takeover of Xstrata Plc to at least four times the initial forecast.

The acquisition Glencore completed in May will generate at least $2 billion in synergies next year, the Baar, Switzerland-based company said today in a statement. Closing 33 Xstrata offices, firing workers and cutting costs at existing operations has saved $1.4 billion, it said.

The $29 billion purchase created the world’s fourth-biggest mining company, adding coal, nickel, zinc and copper mines to Glencore’s trading empire. The deal was expected to generate annual cost savings “well above” the stated $500 million plan, Chief Executive Officer Glasenberg said in May. Morgan Stanley estimated $800 million of savings, it said yesterday.

“With a beat to cost savings and sizable capex reductions, this release is likely to be well received by the market,” Heath Jansen, an analyst at Citigroup Inc., said in a note to clients. There will be “more to come” in future savings, Glasenberg told investors today in London.

Glencore advanced 2.3 percent to 328.75 pence in the city today, the highest closing price since May 30. The stock has declined 6.4 percent this year.

‘Rapid’ Integration

“We have successfully and rapidly completed the integration of Xstrata,” Glasenberg, 56, said in the statement. “A significant portion of the synergies are in overhead costs at head and regional offices. We are only just starting to comprehensively look at the combined mining and metallurgical operations.”

The company has reviewed 88 projects acquired from Xstrata and decided to suspend 44 of them, it said. It also raised the cost estimate for its Koniambo nickel project, inherited from Xstrata, by $1 billion to $6.3 billion. The cost of expanding the operation was increased by about $800 million from an earlier projection.

The operating cost estimate also increased 41 percent. Chief Financial Officer Steve Kalmin told reporters in London today the project was “another destroyer of capital.”

Glencore last month wrote down the value of assets acquired in the takeover by $7.7 billion to reflect “the broader negative mining industry environment.” The company, the world’s biggest exporter of power-station coal, reported a first-half net loss of $8.9 billion on the writedowns.

‘Supply Shock’

Most metal markets are experiencing a “supply shock” and won’t start to tighten until the middle of the decade, Barclays Plc analysts said last week. Glencore Xstrata employs about 190,000 people in more than 50 countries across industrial and trading divisions.

BHP Billiton Ltd., Rio Tinto Group and Vale SA are among rival producers cutting costs, selling assets and reducing spending to counter lower prices and weaker profits. Glencore today said it is likely to pursue further asset sales, in addition to the Las Bambas mine in Peru, once it completes a portfolio review.

Glencore reduced its capital-spending budget for the three years through 2015 by $3.5 billion from $29 billion. “Sustaining” annual spending is then estimated at $4 billion, compared with an earlier forecast of $4 billion to $5 billion.

Glencore 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 company said it has had to adjust to a “new reality” in coal markets since the takeover was announced in February 2012 as prices fell on waning demand.

Suspended Coal

It has put 10 coal projects on hold, seven of them in Australia. These include the Wandoan mine, port and rail project in Queensland state, where Xstrata had previously estimated a A$6 billion ($5.5 billion) operation starting in 2014 to produce 30 million tons a year.

Glencore said it’s now the third-biggest producer of mined copper, third-largest in nickel and biggest in zinc and lead.

The company is 25 percent owned by management. Glasenberg, who holds an 8.3 percent stake, reaped a $173 million dividend for 2012.

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

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