Glencore's Stock Hit by $7.7bn Writedown of Xstrata Assets

Glencore Xstrata shares have tanked after the company booked a multibillion pound loss on the value of Xstrata assets in its first set of results since the two groups merged.

The newly formed commodities giant's stock traded nearly 4% lower, to 290.70 pence, at 9:30 BST in London. Glencore had to wipe $7.7bn (£4.9bn, €5.7bn) off the value of Xstrata assets, as it reported a 9% drop in core profit for the first six months of 2013.

The writedown is primarily due to lower commodity prices.

First-half earnings before interest, tax, depreciation and amortisation totalled $6bn, compared to a pro-forma $6.6bn a year ago.

Glencore, which completed its acquisition of miner Xstrata in May, said that post-merger integration was moving "ahead of expectations". It expects 'synergies and other cash savings to materially exceed (the) previous guidance of $500m' per year.

The miner, 25% owned by management, will still dole out an interim dividend of 5.4 cents a share.

An investor meeting is scheduled for 10 September, which will throw more light on expected company strategy, including portfolio reviews and capacity for expansion, said Glencore Xstrata in a statement.

'Strong outperformance in some divisions offsetting weaker market conditions elsewhere. The strong performance of our marketing division is particularly pleasing in what has been a difficult period for commodities. We remain positive on the market outlook and continue to see solid end use demand growth in our major commodities,' Glencore said in the statement.

Some investors may find the number on the Xstrata writedown "somewhat jarring, especially given management rhetoric on capital allocation," said Bank of America Merrill Lynch analyst Jason Fairclough in a client note.

Glencore acquired Xstrata assets following a $29bn "merger of equals" earlier this year. Following the merger, Glencore's management has been assessing the value of Xstrata's assets.

In its first-half production report, the group said the production of copper, nickel and gold improved, while that of zinc and lead declined.

The Xstrata acquisition added coal, nickel, zinc, and copper to Glencore's commodity trade portfolio.

Falling Commodity Prices

Nickel prices have tumbled by as much as a third from 2007 and it is expected to hit Xstrata's $5bn operation in New Caledonia. In addition, the value of the group's copper projects may also be cut as a result of the slump in prices.

The mining sector has had to slash the value of its assets since the start of 2013 due to recent falls in commodity prices.

Many high-profile projects suffered loss of value as prices fell. In January, Rio Tinto announced $14bn of impairment charges related to its underperforming Mozambican coal and Canadian aluminium operations.