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The share price of Glencore (LSE:GLEN) dropped by 3.11% in trading today, closing at 291.20. Since Glencore acquired Xstrata in May 2013 the impact of picking up the coal mining assets has combined with the broader world economic conditions to weigh on the company’s FY 2014 results.
Taking the good with the bad
On the bright side, Glencore generally outperformed expectations for the mining and energy sectors. However, the impact of Xstrata on the bottom line is now obvious. Aside from one-off charges, looking at FY 2014 without Xstrata, Glencore delivered a 17% increase in net income. Looking at the full year with Xstrata, the group returned only a 7% increase, yet coming in at $4.2 billion against estimates of $4.08. These are “what if” scenarios, but they most adequately demonstrate the effect that Xstrata has had on the group as a whole this past year.
Lest we ineptly rush to some sort of narrowly-focused judgment that the Xstrata deal was a bad one, let us remember that it is only one of many components that must be factored into Glencore’s overall performance. At an acquisition cost of $29.5 billion it seems like a far larger piece of the pie than it actually is.
It’s not so much the numbers the company reported that caused the FTSE 100 constituent’s share price to tumble as it is the broad scope of lower commodity prices that put the squeeze on every company in the energy sector, as well as on every operating division of Glencore. All things considered, Glencore performed well, generating a reported net income of $2.3 billion and an adjusted net income of $4.3 billion.
The Glencore board has recommended a 9% increase in the final cash dividend to $0.12, putting the total annual dividend at $0.18 per share.
Benefiting from “robust” cash flow, the company was able to reduce net debt by 15% from $5.3 billion to a total of $30.5 billion.
Looking forward to the good with the bad
CEO Ivan Glasenberg noted that “Our ultimate goal remains to grow our free cash flow and return excess capital in the most sustainable and efficient manner. As the most diversified raw material producer and marketer, Glencore is well positioned to react to and benefit from changes in commodity fundamentals. Glencore will continue to focus on maximizing the value of the potential within our businesses. We look forward to the future with confidence.”
As part of the business plan for 2015, the board has decided to reduce capex spending from the $7.9 billion originally budgeted to something in the range of $6.5 to $6.8 billion.
With the commodity markets in a state of upheaval, “As the most diversified raw material producer and marketer, Glencore is well positioned to react to and benefit from changes in commodity fundamentals,” according to Glasenberg.
In a separate phone interview he commented that “We have a different strategy to our peers. We still believe we’ve got the right exposures in the right commodities.”
