Xstrata to review relationship with trader after results mishap
XSTRATA is reviewing the status of its relationship with Glencore, City A.M. understands, after Glencore’s maiden results prompted a three per cent drop in the miner’s share price due to a “negative read-across” by analysts.
Glencore, which owns 34 per cent of Xstrata, published its first quarterly results since listing yesterday, including a net income figure of $554m from associates.
Nomura analyst Paul Cliff put out a note later in the day that said: “We estimate that Xstrata normally accounts for around 97 per cent of Glencore’s net income from associates, which suggests an Xstrata first-quarter net income of around $1.6bn.” That is substantially below consensus forecasts of $4.1bn, he added.
It is understood that Xstrata has up to now given Glencore a more detailed breakdown of its ongoing financials than it releases to the markets, which only receive a quarterly production update. The numbers on which Glencore based its results figures were disclosed to the trader before its float, City A.M. understands.
Now that Glencore is listed and must publish financial results each quarter, in part due to its bond investors, Xstrata is reviewing its level of disclosure to the company.
The two companies have had a close relationship ever since Glencore, then called Marc Rich & Co, acquired a major holding in Xstrata in 1990. In 2002, Glencore spun off a collection of coal assets that now belong to Xstrata. And they share several board members.
Markets have repeatedly speculated about a merger between the two, with some suggesting Glencore’s float, raising $10bn, has provided it with ample capital for a takeover.
RESULTS: REACTION
● RESULTS
Revenues rose 39 per cent compared to the first quarter of 2010, to $44.2bn. Adjusted earnings before interest and taxes rose to $1.8bn, up 45 per cent on the equivalent quarter last year. Most profits came from Glencore’s mining assets, though its float prospectus showed that the vast majority of revenues stem from its trading division.
● MANAGEMENT
Chief executive Ivan Glasenberg commented: “Our first-quarter results show that Glencore continues to deliver shareholder value whilst emphasising the unique benefits of having large scale marketing and industrial asset activities.”
● ANALYSTS’ RESPONSE
Analysts were overall disappointed by the results. Nomura’s Paul Cliff said: “We had expected more of a blow-out first quarter for the marketing business… While this is clearly not the case, it does, however, suggest that the quality and stability of earnings in the marketing business is perhaps better than we expected.” But others said the stock is still teething. “They were below expectations but the range was quite wide,” Killik’s Jonathan
Jackson said. “Given the float was so recent, we wouldn’t have wanted to see any big surprises.” Numis’ Andy Davidson said many analysts were waiting for several quarters of results before forming a definitive judgment: “The business model is not well-understood. It’s thought of as a mining stock but they have a fantastic amount of intellectual property and deep knowledge of the commodities market.” The tentative approach from analysts could explain why one senior bank told City A.M. that Glencore’s aftermarket performance lacked the “oomph” many had anticipated.