Glencore Xstrata's Success Will Depend on Intergration, Coal's Price - CEO

By Alex MacDonald

LONDON--The chief executive of the newly merged Glencore Xstrata (GLEN.LN) said it may take five years to determine whether Glencore's merger with Xstrata was a success, adding that much will depend on its integration plan and how commodity prices perform, particularly coal.

Ivan Glasenberg, the CEO of the merged entity and its largest shareholder, told The Wall Street Journal in an interview that he's still concerned about whether the merger will be considered a success.

"Did I pay the right price? Am I going to be able to jell these things, will the commodity markets remain strong so that it will justifies putting all of this money into an asset rich company? It's my biggest fear." he said.

Commodities titan Glencore International PLC (GLEN.LN) and Anglo Swiss miner Xstrata PLC (XTA.LN) announced 15 months ago plans to merge their operations into a globally diversified natural resources company with a market capitalization of $66 billion. The deal has faced many twists and turns, not least in securing shareholder and regulatory approval.

Glencore said in a statement Thursday that the merger between the two companies is now effective and the entire issued share capital of Xstrata is now owned by the Glencore Group.

"Not one glass of Champagne will be opened," said Mr. Glasenberg on the day of the deal's closure. "Talk to me in five years time. Maybe we will open a glass of Champagne" at that time.

Mr. Glasenberg said the future success of the company hinges on commodity prices, particularly coal, which has dropped significantly since the merger was first announced due to slower-than-expected Chinese economic growth and the health of the U.S. and European economies.

Mr. Glasenberg said both companies were pretty equal in terms of zinc and copper production but Xstrata is much bigger than Glencore in coal. The deal is "a big play on coal," he said. "To really screw this up coal price has got to really tank. You have to look at that," he added.

Commodity prices aside, Mr. Glasenberg said he's keen to complete the integration of the two companies as quickly as possible. Glencore has a 100-day integration plan that includes removal of job duplication and head offices at Xstrata's five business units. He expects the restructuring to take 30 days to complete while the remaining days will be spent on extracting value from its portfolio of assets. Mr. Glasenberg said it wasn't possible to put a number on how many jobs might be lost but he noted "it's going to be big."

In a letter to employees, Mr. Glasenberg said, "For the vast majority of employees, particularly those involved in the key front-line process of production and marketing, there should be little impact on your day-to-day activities. Those who will be affected within the various management structures will be notified directly and as soon as practicable."

The corporate restructuring into a more centralized organization will result in cost savings, Mr. Glasenberg said, but he declined to provide a figure. He said that about 80% of the potential synergies have already been identified but more work needs to be done. The company plans to deliver at least $300 million in cost savings synergies as identified by Xstrata's management's last year and will deliver $500 million in extra Ebitda (earnings before interest, taxes, depreciation and amortization) synergies annually by marketing all of Xstrata's commodities through Glencore's marketing arm, Mr. Glasenberg said.

In terms of capital expenditure, Glencore Xstrata will stick to the combined company's committed plans until 2015 but will then reassess its capital expenditure plans thereafter. Mr. Glasenberg said, "I'm not a lover of greenfield" projects but he said he would reassess their value depending on how much it would cost to keep them in the project portfolio. "I don't want to spend a lot of money to maintain them....If it costs too much to maintain, we may have to sell them."

Xstrata has a raft of greenfield copper projects, including Tampakan in the Philippines, Alumbrera or El Pachon in Argentina or Frieda River in Papua New Guinea.

--John Miller contributed to this story

-Write to Alex MacDonald at [e-mail]

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