Record highs and commodity writedowns | FT Alphaville

Record highs and commodity writedowns

On the day the Dow is expected to open at a record high, the hottest M&A story of the year — Glencore and Xstrata — brings us the following.

First the collective news (via the FT):

Glencore and Xstrata, weeks away from a multibillion tie-up, have posted significantly lower annual net profits, dragged down by a combined $2.6bn in writedowns in their aluminium, nickel and platinum businesses. The impairments cap a tumultuous reporting season for the London-listed mining sector, with almost every FTSE 100 miner reporting writedowns in the face of weaker commodities prices and cost overruns in key projects.

As for Glencore specifically:

Glencore, the world’s largest commodities trader, said its net income fell in 2012 to $1bn, down 75 per cent from $4.05bn the previous year after it took $1.6bn in impairments, mostly linked to its investment in aluminium producer Rusal.

And this part of Glencore’s annual report, we’d say, is probably the most eye catching because it illustrates the degree to which the commodities power house has been leveraging up over the year. (Take note of the increase in committed and uncommitted secured inventory/receivables borrowings):

There’s also this from the statement:

Xstrata secured bank loans In June 2011, Glencore refinanced the $ 2.8 billion facilities with 2 year $ 2.7 billion equivalent facilities. The facilities have been accounted for as secured bank loans which bear interest at a rate of U.S. $ LIBOR plus 95 basis points per annum. As at 31 December 2012, shares representing $ 5,397 million (2011: $ 5,343 million) of the carrying value of Glencore’s investment in Xstrata were pledged as security.

This detail on its silver prepayment deal (first mentioned in its interim report last year):

Prepayment During 2006, Glencore entered into an agreement to deliver, depending on mine production, up to 4.75 million ounces per year of silver, a by-product from its mining operations, for a period of 15 years at a fixed price for which Glencore received a partial upfront payment of $ 285 million. The outstanding balance represents the remaining portion of the upfront payment. The upfront payment is released to revenue at a rate consistent with the implied forward price curve at the time of the transaction and the actual quantities delivered. As at 31 December 2012, 17.9 million ounces (2011: 15 million ounces) have been delivered.

This about its unfavourable coal deal:

Upon acquisition of Optimum in March 2012 (see note 24), Glencore recognised a liability of $ 688 million related to an acquired contractual agreement to deliver 44 million tonnes of coal over a period ending 31 December 2018 at fixed prices lower than the prevailing market price for coal of equivalent quality. This amount will be released to revenue as the underlying tonnes of coal are delivered to the buyer over the life of the contract at the rate consistent with the implied forward price curve at the time of the acquisition. As at year end, approximately 39 million tonnes of coal remain to be delivered.

And last and not least some details about its latest Rosneft prepayment deal:

Rosneft On 21 December 2012, Glencore and Vitol agreed heads of terms for long term crude and oil products offtake contracts with Rosneft under which Rosneft will deliver up to 67 million metric tonnes of crude oil and oil products (by mutual agreement) over a period of 5 years split 70/30 between Glencore and Vitol. Additionally, Glencore and Vitol will jointly arrange up to a $ 10 billion prepayment facility in favor of Rosneft, in which Glencore expects to hold a participation of up to $ 500 million alongside a broad syndicate of banks. The closing of such facility is expected by the end of Q1 2013.

As for Xstrata, the FT reports:

Xstrata reported a 79 per cent drop in net income for 2012 to $1.18bn after taking nearly $978m in writedowns. Excluding the impact of the impairments, the mining company said profits fell 37 per cent to $3.65bn. Mick Davis, chief executive, said the company suffered due to the “the combined impact of falling commodity prices, ongoing inflationary pressure on operating costs and continued strong producer currencies relative to the US dollar”.

You can see the full Xstrata release here.

Mining asset writedowns, prepays and inventory financing … a complex web of interconnections, which are definitely worth watching if and when commodities continue to slide.

For now, however, the share reaction has been positive since expectations have been well managed and not much of anything — especially the Rusal writedown — has come as a surprise.


Related links:
Has Ivan started drinking what Mick was drinking? – FT Alphaville
Hey, spendy miners, operate Glencore style – FT Alphaville
Deripaska on the collateralisation of aluminium – FT Alphaville
Oh, Rio, Rio… – FT Alphaville