In what’s likely to be its final earnings release before swallowing Xstrata whole, Glencore continued to emphasize the “resilience” of its business model, calling out a comparably strong 2012 financial performance versus mining peers in multiple slides of its presentation to investors and analysts. The relative resilience of underlying profits is perhaps the most important question investors must answer in valuing Glencore, especially the big black box that contains its trading and marketing operations.
The headline numbers from Glencore’s 2012 would certainly seem to back up management’s narrative. Excluding the stake in Xstrata, Glencore’s EBITDA dipped a mere 3% in 2012, versus declines in the 30%-35% range endured by major miners.
While a closer examination of the underlying results suggests some truth to management’s claim of resilience, it also reveals a lumpiness that detracts from the narrative. Specifically, the ramp-up of oil production off the coast of West Africa and the normalization of performance in the agricultural marketing business following a heavy cotton trading loss in 2011 drove the appearance of steady profits. Absent these two items, we estimate EBITDA excluding Xstrata would have dropped roughly 25%, a better result than delivered by the major miners, but not quite the steady- Eddie performance pitched by management.
Concurrent with the earnings release, Glencore and Xstrata announced their planned merger has been postponed to mid-April, pending discussions with Chinese regulatory authorities.
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