Glencore holds on for Xstrata deal as profits plummet

Commodities trader Glencore (GLEN.L) took a 26% hit on its first-half earnings as commodity prices slumped, but it remains firm on the terms of its proposed merger with miner Xstrata (XTA.L).

Its first-half net income before significant items fell to $1.81 billion (£1.15 billion), down 26% from $2.44 billion (£1.55 billion) in the same period last year.

However, the shares rose 0.55p, or 0.2%, to 354p as earnings came in at the upper end of analysts’ estimates.

Christopher LaFemina, analyst at Jeffries, commented: ‘The much better than expected results strengthen the Glencore investment case. Glencore is not immune from the difficult combination of falling commodity prices and rising operating costs in the mining industry, as its industrial assets and its 34% stake in Xstrata have historically accounted for as much as 70% of its total earnings before interest and taxes.’

Glencore said it remains committed to the terms of its $30 billion (£19 billion) offer for Xstrata, of which it is the biggest shareholder with a 34% stake.

The stronger-than-expected results could mean the deal is more likely to go ahead. LaFemina continues: ‘It is noteworthy that Glencore's industrial segment reported a smaller 2012 first-half decline (21%) in earnings before interest and taxes than Xstrata, down 43% year on year.’

Xstrata deal on the rocks?

The Glencore-Xstrata tie-up has come under intense pressure from Xstrata shareholders.

Glencore has offered 2.8 new shares for each Xstrata share, but Qatar Holding, the second largest investor in the company, has called for a better offer with a ratio of 3.25 new shares.

Qatar Holding has an 11.3% holding in the miner and could single-handedly block the deal.

With the release of the results Ivan Glasenberg, chief executive of Glencore, said the merger was ‘not a must-do deal’ and he ‘cannot understand’ the demands for more from Glencore as the weakness in the commodity market has made the offer even more attractive.

Xstrata made the biggest losses on the FTSE 100 this morning, down 3.9p, or 0.43%, to 904p. 

LaFemina added: ‘Glencore did not change the terms of its proposed merger with Xstrata today. Public comments from Glencore management have recently indicated that the company is not overly concerned about the risk that Xstrata's 11.3% shareholder Qatar Holdings may vote against the merger.