Glencore Xstrata PLC (LON:GLEN) (HKG:0805) has taken a massive $8.47 billion charge, forcing the company into a net loss of $8.9 billion in the first half of this year. The company had earned a profit of $2.28 billion in the corresponding period a year ago. It’s the first earnings report after the company’s $44.6 billion merger with mining giant Xstrata Plc.
Glencore Xstrata’s mining business disappoints
The heavy writedown included a $7.66 billion goodwill impairment charges. That mean difference between what Glencore paid ($44 billion) for Xstrata takeover and the book value (about $37 billion). Glencore Xstrata PLC (LON:GLEN) (HKG:0805) also wrote off $452 million from the value of its Australian Murrin Murrin nickel business, and another $324 million from the value of United Co of Rusal Plc.
As a result, the company’s core earnings also shrank for the first six months of this year. Earnings before interest and taxes (EBIT) skidded 28% to $3.19 billion, reports Alex MacDonald of The Wall Street Journal. That was because solid growth in Glencore Xstrata PLC (LON:GLEN) (HKG:0805)’s marketing activities was more than offset by poor performance of its industrial activities operations.
Earnings from marketing or commodity trading business soared 6.4% to $1.19 billion. But earnings before income tax (EBIT) for its industrial or mining business plunged 39% to $2 billion in 1H2013, according to AFP. Glencore Xstrata PLC (LON:GLEN) (HKG:0805) also announced an interim dividend of $0.054 a share.
Glencore Xstrata write-down no surprise
Miners spent billions of dollars during the mining boom to boost their production or acquire new assets over the past decade. However, demand for their products has declined recently as Chinese economy continues to slow down. Now they are taking billions of dollars of write-downs. Glencore Xstrata PLC (LON:GLEN) (HKG:0805)’s hefty write-down didn’t surprise analysts. They were already expecting it to announce impairment charges. The recent decline in commodity prices has prompted several mining companies around the world to announce similar charges.
Glencore Xstrata PLC (LON:GLEN) (HKG:0805) CEO Ivan Glasenberg said in a statement that write-down is unlikely to change the value of the deal because the real value can be calculated only after 5-10 years. Glencore Xstrata PLC (LON:GLEN) (HKG:0805) expects the merger to generate at least $500 million in cost synergies. The company will provide all the details of merger and its future plans during an investors’ meeting on September 10.
The newly merged company has a market value of approximately $64.16 billion.