Glasenberg writes off $8 billion. Yawn
Glencore Xstrata CEO Ivan Glasenberg on Tuesday announced asset impairments, accounting charges and other non-cash losses of close to $9 billion.
The shares were duly marked down, but not by much.
Most investors remained phlegmatic despite the eye-watering numbers (even by recent mining industry standards).
That's because the write-offs didn't exactly come as a surprise and neither do they say much about the company's fundamentals:
- Glasenberg was always going to take the pain upfront because he wants to build up the merged entity from a low base. (If Mick Davis were able to cling to the top spot he would've done the same.)
- That $7.7 billion of goodwill relating to Xstrata is just a paper loss following a paper merger.
- So $324m was taken off the Rusal stake following an accounting change. Anyone with a passing knowledge of Rusal's troubles may be heartened by the fact that there was $324m left to impair.
- Same logic could be applied to the $452m charge against Murrin Murrin nickel.
- Accounting aside, underlying profits of $1 billion a month are ahead of expectations.
- Mining was always going to struggle given metals prices, but trading profits grew and now make up more than a fifth of the total.
- The merged firm should be much easier to manage than Xstrata was with its bottom-up structure. 15 of the top 17 executives of Glencore Xstrata worked for the former.
- The copper business is going gangbusters. African output is up 42%, Antapaccay is ramping up and Glencore Xstrata could get more than $5 billion selling Bambas. That copper is up 10% since end-July is just cream on top.
- Glasenberg predicts post-merger cost savings "materially in excess" of the promised $500 million annually. And it looks like the soon-to-leave Xstrata bosses are going to feel the brunt: their bonus pool has already shrunk by 89%.
Some have argued that the merger of Glencore and Xstrata, first announced in February 2012, was the perfect example of the excesses of the mining sector coming, as it did, just as the commodity supercycle was ending.
That may be too harsh.
And Glasenberg's strong medicine today may be enough to kickstart a recovery. Perhaps a more sustainable one this time.
Image of Ivan Glasenberg winning the Person of the Year award at the FT ArcelorMittal Boldness in Business Awards March 2013 is from the Financial Times.