Should I Buy Glencore International?


LONDON -- These are heady days for mining and trading giant Glencore International , as it moves closer to completing its 22 billion-pound merger with fellow FTSE 100-listed miner Xstrata PLC. Both companies have just published their results, presumably as separate entities for the last time. Elsewhere, I'm asking the question "Should I Buy Xstrata?" Right now, I'm wondering if I should buy Glencore International?

Oil up, metals down
Glencore's full-year results for 2012 was a mixed bag, but the market wasn't complaining, driving the shares 5% higher. Group revenue rose 15% to 214 billion pounds, but underlying earnings fell 8%, largely due to falling commodity prices. The mining division's 27% drop in adjusted earnings was offset by Glencore's marketing operation, which posted an 11% increase, underlining the benefits of diversification. In total, adjusted earnings before interest and tax fell 17% to $4.5 billion. Unadjusted earnings per share fell 81%, while group net debt rose by 19% to $15.4 billion. Profits plunged 75% to $1 billion, largely due to that commodity price tumble and impairment charges, with Glencore taking a $1.2 billion hit on its reclassified stake in Russian aluminum producer Rusal. Net income fell to just over $3 billion, roughly as expected.

Xstrata marks the spot
Despite that profit plunge, Glencore announced a 5% increase in its dividend, which is good news for chief executive Ivan Glasenberg, who enjoyed a handy little dividend of 113 million pounds for this year. He hailed 2012 as "a year of significant achievement," with healthy growth in its industrial and marketing operations, while its acquisition of Viterra has given Glencore a "truly global" agricultural business. At the top of the list, naturally, was its proposed merger with Xstrata.

Thinking big
Glasenberg is confident he will soon get the green light from China to seal the 22 billion-pound merger with Xstrata, which should bring even greater diversification, cost savings, and synergies. He was tightlipped about his plans for the new group, which will be larger than both BHP Billiton and Rio Tinto, although given the recent successes of Glencore's marketing operations, we can expect that to be a key priority. He is banking on the new operation's strength to ride out any market weakness, and maybe make acquisitions at favorable prices. Big could be beautiful.

Glencore holding
Glencore yields 2.7%, covered 4.8 times, with a progressive dividend policy. Trading on a price-to-earnings ratio of around 11 times earnings, it isn't too pricey. Like all the major miners, Glencore is exposed to a further economic downturn, a Chinese hard landing, rising labor costs, and falling commodity prices. The merger brings added risk, as mergers do, but also plenty of opportunity. As recent results have shown, there is strength in diversity -- and Glencore has a lot more diversity to come.

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