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Glencore Profit Tops Estimates on Oil, Ag Trading

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Glencore Plc, the commodity trader and metals producer run by billionaire Ivan Glasenberg, reported profit that beat estimates as oil and agricultural trading helped it weather a rout in resource prices.

Adjusted net income declined 7 percent to $4.29 billion in 2014 from a year earlier, the Baar, Switzerland-based company said Tuesday. That beat the $4.08 billion average of 18 analysts’ estimates compiled by Bloomberg. Adjusted earnings before interest, tax, depreciation and amortization at its trading business, which includes the sale of commodities from crude to copper, rose 15 percent to $3 billion.

The Bloomberg Commodity Index of 22 raw materials dropped to its lowest in more than 12 years in January amid slowing demand from China, the biggest buyer of copper and iron ore and the largest consumer of energy. The results distinguish Glencore from BHP Billiton Ltd., Rio Tinto Group and Vale SA, the world’s biggest mining companies, which last month reported lower profit as declines in iron ore, copper and oil sapped earnings.

“Once again we proved that trading is resilient against commodity price movements,” Chief Executive Officer Glasenberg, 58, said in a phone interview. “We have a different strategy to our peers. We still believe we’ve got the right exposures in the right commodities.”

Glencore fell 3.1 percent to close at 291.20 pence in London trading, valuing the company at 38.1 billion pounds ($58.7 billion). After rising 20 percent last month, analysts at Jefferies LLC said “we would not be surprised by profit-taking weakness in the near-term.”

The company reported a 9 percent increase in its dividend to 12 cents a share.

Share Buyback

While Glencore decided not to extend a $1 billion share buyback program initiated in August, Glencore will consider further purchases when it announces first-half results in less than six months, Chief Financial Officer Steve Kalmin said in a phone interview.

“Once we start getting more confident about the fundamentals prevailing through our commodity suite” and the company is able to more accurately forecast cash flow as well as generate surplus cash, it will consider buybacks, he said.

Glencore’s underlying free cash flow is the strongest among its peers thanks to the stability and significant cash-generation properties of its trading division, Credit Suisse Group AG analysts wrote in a report Monday before the results.

Price Volatility

Adjusted earnings before interest and taxes from trading rose 18 percent to $2.8 billion, representing 42 percent of Glencore’s total, compared with 32 percent a year earlier. Ebit from agricultural trading rose fourfold to $856 million after the 2013 acquisition of Canadian trader Viterra.

“The returns for the marketing division were resilient despite the challenging price environment, confirming the stable margin business model of the segment,” Paul Gait, a mining analyst at Sanford C. Bernstein Ltd. in London, said in a report. “The company continues to emphasize on growing the free cash flow base and enhancing shareholders’ returns.”

Some traders are benefiting from increased commodity-price volatility and the return of a contango structure to crude markets where future prices are higher than current levels. That allows traders to profit by buying futures contracts and storing oil for delivery at a later date. The decline in prices means traders are also paying less to finance their activities.

Glencore described the 2014 oil market as “a tale of two halves,” with the first six months marked by low volatility and Brent crude prices of $105 to $110 per barrel.

Transformative Decision

The Organization of Petroleum Exporting Countries’ decision not to cut production at its November meeting was “transformative,” and led to a spike in near-dated crude volatility of more than 40 percent, the company said. The decision sent prices tumbling almost 50 percent from a June peak and led to a “significant build” in oil storage, it said.

“It is looking very well-structured for oil trading,” Glasenberg said in a conference call with analysts. “If it continues like this, oil could have a blowout year.”

Depending on market conditions, the trading division could exceed the upper end of Ebit targets of $3.7 billion this year as it has in the past when conditions were favorable, Glasenberg said.

Still, Alex Beard, Glencore’s global head of oil, said that while contango in the crude market gives traders the opportunity to profit by storing oil on land and hedging forward, the margins aren’t sufficient to justify floating storage.

No Super Profits

“They are by no means, at current spread levels, attractive enough to encourage large amounts of floating storage,” Beard said, adding that Glencore is more exposed to oil-product markets that aren’t currently in contango. “The super contango and the super profits in the crude oil market are just not there at the moment.”

Crude oil trading volumes rose 16 percent to 448 million barrels in 2014 from the previous year, Glencore said in the report. Oil product trading volumes fell 11 percent to 645 million barrels.

Glencore’s world-leading position in the export of energy coal sapped profits at its mining division after the price of the fuel dropped about 17 percent last year. In response to the slump, the company has started scaling back its coal-mining operations in Australia amid a global supply glut.

To combat falling prices and waning demand, investors have demanded the world’s biggest mining companies slash spending on new mines and return more cash to shareholders.

Spending Cuts

Producers will cut spending on projects and exploration by $20 billion this year, according to estimates from Macquarie Group Ltd., as they rein in growth plans amid waning prices. Last month, Glencore trimmed its spending for 2015 to a range of $6.5 billion to $6.8 billion from an earlier target of $7.9 billion.

Net debt dropped 15 percent to $30.5 billion, Glencore said. The company booked $847 million of impairment charges on platinum, iron ore and oil assets for the year.

Glencore completed the $29 billion acquisition of Xstrata Plc in 2013 to add coal, copper, zinc and nickel mines to its trading empire.

Its approach to Rio Tinto about a possible merger was rebuffed by its larger rival in October. That effectively barred it from bidding for six months under U.K. takeover rules. Rio last month reported a 9 percent decline in underlying profit for 2014 and announced a plan to buy back $2 billion of shares.

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

(Updates with analyst comment in fifth paragraph.)
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