Glencore Xstrata hit by $10 billion merger costs

Half-year results from Glencore Xstrata sparked debate on Tuesday, as the resources group reported higher-than-expected costs in relation to the recent merger with Xstrata.

The group took a $10 billion (£6.4 billion) hit in terms of costs, impairments and write-downs, compared to market expectations ranging between $4 billion and $7 billion. Shares were down 3.7% in morning trading.

"The synergies and cost savings from the merger will be materially in excess of previous guidance," commented chief executive officer Ivan Glasenberg. He described the period as "transformational", with "excellent progress" having been made integrating the businesses.

Adjusted EBITDA was down 15% to $4.7 billion, due to weaker pricing of core commodities. Net debt increased in line with the group's expectations from the ongoing expansions, and an interim dividend was declared at $0.054 per share, in line with last year.

Glencore Xstrata is now focusing on "disciplined allocation of capital", as a large portion of production costs remain above market prices. Still, the group is positive on the medium to long-term future: "Coal prices remain low relative to other forms of energy and with better prospects for the global economy, coal is well placed to capitalise on this growth."

Analysts' view

Roger Bade, analyst at Whitman Howard, called the results "a complete dog's breakfast", pointing to the $10 billion hit from the acquisition as the key factor to blame for the loss per share of $0.99.

"If we assume there are no further write-downs and underlying earnings are two times $1.15 billion, and those earnings are added to equity, the underlying return on shareholders' funds is a miserable 4.5%," concluded Bade.

Mike van Dulken, head of research at Accendo Markets, pointed to questions simmering about whether Glencore paid too much for Xstrata in terms of the cost of acquisition and integration. The timing has also been queried, "as global sentiment regarding growth and recovery have encountered rocky ground".