Glencore Xstrata hosted an Investor Day in London on September 10 to provide a detailed update on the progress of its integration since Glencore International and Xstrata completed their merger in May. Presentations focused on initial results of the merged company’s portfolio review, synergies identified and approach to capital allocation.
Glencore Xstrata made special note of the fact that the integration of the two companies was completed within three months with no operational disruption. At least $2 billion of merger synergies are now estimated for 2014, materially exceeding the initial merger guidance of $500 million. Approximately $450 million of the $2-billion total will come from marketing synergies, $175 million from financing synergies and $1.4 billion from cost savings.
Glencore Xstrata continues to work toward achieving operational efficiencies through a comprehensive review of assets. An important focus is to ensure that key projects are delivered in the best possible manner.
A $3.5-billion reduction is being instituted in planned capital expenditures during 2013 to 2015. Sustaining capex is expected to be about $4 billion, at the lower end of previous guidance of $4 billion to $5 billion. Capital expenditures are expected to be significantly reduced after 2015, as current projects are completed and brought into production. Greenfield projects have been deprioritized, with a material reduction in scope and costs.
Glencore Xstrata CEO Ivan Glasenberg said, “We have successfully and rapidly completed the integration of Xstrata, identifying at least $2 billion of synergies by 2014. 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.
“Glencore will have a diversified and defensive asset base with an increasingly strong cost curve position. With our strong balance sheet and cash flow, I am pleased to remind investors of our commitment to return cash to shareholders.
“This is an interesting time for the sector, and an exciting one for Glencore. There is sound demand for commodities, and we see positive signs of financial discipline across the sector. This provides an environment in which Glencore’s owner-manager philosophy will thrive.”
In his presentation, Glasenberg emphasized his conviction that the mining industry over-produces and that during the boom years of the past decade, profits have been invested in massive projects, with massive cost over-runs and little return to investors. This will not be the case for Glencore Xstrata going forward, Glasenberg said.
The company is especially wary of greenfield projects, which it sees as disproportionately risky, combining multiple uncertainties in forecasts with long lead times. Extreme environmental, infrastructure, and engineering challenges compound the risk, which makes precise cost forecasting almost impossible—hence recent average project cost over-runs of 35%, Glasenberg said.
Glasenberg made special note of the fact that Glencore Xstrata is the most diversified of the major minerals producers, with the company’s business divided among copper 30%, coal 14%, zinc 13%, oil 4%, nickel 3%, metals marketing 22%, energy marketing 16%, agricultural marketing 1%, and corporate 3%.