In its first set of results as a combined group, Glencore Xstrata revealed a $7.7bn writedown on the value of Xstrata’s mining assets. That dragged net losses for the company to almost $9bn in the first half. The $44bn merger between Glencore, which specialises in commodities trading, and mining group Xstrata was only completed in May. Other miners have also struggled as the commodities supercycle has wound down. BHP Billiton this week revealed a 30% drop in annual net income to $10.9bn.
What the commentators said
Many suspected that Glencore was overpaying for Xstrata, said Lex in the FT. Now we know for sure that it did. Glencore CEO Ivan Glasenberg now says he is confident that he can exceed the trumpeted annual synergies and costs savings of $500m. “But that will not even touch the sides of the value already destroyed.”
The deal was a “foolish move” for a “supposedly sophisticated trader” like Glencore, said Ben Chu in The Independent. With commodity-hungry China slowing, metal prices have slumped. There was always a danger that Xstrata would later prove to be worth less than Glencore paid for it in May. The huge mergers “that get fee-hungry bankers and analysts excited” usually end up destroying value for the acquirer. Xstrata has “demonstrated this in double-quick time”.
The entire sector hasn’t exactly covered itself in glory in recent years, noted Nils Pratley in The Guardian. The capital invested over the past decade “has dwarfed returns to shareholders”. The industry’s compound annual growth rate of 13% in shareholder returns since June 2003 looks like “a squandered opportunity” during the China-led era of high raw materials prices. And the outlook for miners is uncertain: “executives still cling hopefully to the prospect” of 7.5% GDP growth in China. But they “don’t seem to have a plan B if Beijing can’t deliver”.
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