Glencore Xstrata to dig down in Russia

Acquiring a stake in Russian oil company Russneft may not be so clever, given the turmoil in Ukraine.

by Rachel Savage
Last Updated: 02 Dec 2014

Glencore Xstrata has reported its first annual results since last May’s mega-merger and they’re not bad, considering the slow-down in demand for natural resources from emerging markets, particularly China.

However, continuing question marks over the sale of a Peruvian mine and the potential acquisition of a stake in Russian oil refiner Russneft could yet bury the commodity colossus’ future results.

Glencore’s adjusted earnings (on a pro forma basis, where accountants cleverly imagine the merger happened in 2012) were as flat as unmined earth year-on-year at $13.1bn (£7.8bn). However, it was veritable gold for analysts, who had expected a figure of $12.4bn.

The mining monolith said it had identified $2.4bn worth of cost savings this year from the merger with Xstrata, above the $2bn it previously estimated. Clearly, chief exec Ivan Glasenberg, who has an 8.3% stake in the company, has found more ‘fat to cut’ (rather than trim then).

However, a risk for the miner is its deal with Russneft (as opposed to state-owned oil company Rosneft, who hounded BP out of Russia), which repaid it $1.2bn in 2013 (the debt was $2.1bn at the end of 2012). The loan has been renegotiated so that Glencore can take a $900m stake in the Russian oil company this year, subject to due diliegence and valuation, but that deal isn’t looking so clever now with the Kremlin stomping all over Crimea and western sanctions against Russia in the offing.

There was also no news on the progress of the sale of the Las Bambas copper mine in Peru, which was demanded by Chinese competition regulators as a condition for the Xstrata deal.

Glencore is expected to sell the mine to Minmetals, a Chinese company (natch), and a price of $5-5.5bn was grinding in the rumour mill. However, IFA magazine reported last week that talks had got stuck in a rut, as Glencore’s reserve price is a lot higher.
 
With the Chinese economy continuing to lose momentum as well (although it’s still steaming ahead compared to western countries), emerging markets may be more explosive toxins than buried treasure for Glencore.

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