COMMENT: Iron ore, the Glencore way

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The Baar-based company is now looking for savings of $2 billion in 2014 through the integration of Xstrata’s operations, Glencore told investors in London on Tuesday September 10.

A detailed run-down of cost-cutting plans was presented by the heads of Glencore Xstrata’s coal, copper, oil, nickel-zinc, ferroalloy and agriculture divisions.

Iron ore and aluminium were the only major divisions at the company not represented on stage at the investor event, although the commodity giant’s iron ore production and marketing heads, Mark Eames and Christian Wolfensberger, were present.

An enlightening wrap-up of the company’s iron ore business has been posted on its website, however, detailing Glencore’s application of strict cost discipline to its iron ore business.

Strategic aims

• Integrate iron ore operations across the Glencore and Xstrata businesses, seeking savings of $19.3 million and slashing employee headcount by 50%.
• Assist new producers in Australia and Brazil with market entry, highlighting offtake financing as a key factor.
• Market iron ore outside the traditional Pilbara and Brazilian specifications.
• Target 25 million tonnes traded in 2013 (Glencore traded just under 20 million tonnes in 2012).
• Help start-up and junior miners in new production centres by providing offtake agreements and marketing assistance.
• Leverage the office network to increase the customer base.
• Offer hedging and options for quotation periods traditionally not offered to the iron ore market.
• Source material from a range of clients, from juniors to the big four – Vale, BHP Billiton, Rio Tinto and Fortescue Metals Group (FMG).

Glencore’s iron ore marketing mix for the first half of 2013 was 73% fines, 14% concentrate, 9% lump and 4% pellet feed.

Asset-light resource profile
Glencore describes its iron ore model as “asset light”, with a slim resource profile of shares in early-stage mines, mostly inherited from Xstrata, as well as offtake agreements with producing miners.

Offtake partners include West African producers London Mining, African Minerals and Bellzone, as well as US-focused magnetite producer Strategic Minerals.

Glencore also owns 4% of Brazilian miner Ferrous Resources, the stake combined with offtake, giving it the potential to grow in Brazil.

The company’s two Mauritanian projects, 88%-owned Askaf and 44%-owned El Aouj, both have access to existing infrastructure and potential for brownfield expansion.

Two projects in the Republic of Congo complete Glencore Xstrata’s known iron ore portfolio – a 5% stake in Core Mining’s Avima project, and 50% of joint-venture magnetite and direct shipping ore project Zanaga.

However, with Glencore Xstrata ceo Ivan Glasenberg highlighting a focus on brownfield developments around existing mines in preference to greenfield projects, question marks arise about the future of early-stage projects such as Zanaga.

Glencore Xstrata announced on September 13 that the Zanaga project would now progress on the basis of staged development, with initial expenditure cut by more than half to $2.5-3 billion from a previous $7.4 billion.

Under the terms of its joint-venture agreement, Glencore Xstrata is obliged to fund the Zanaga project up to completion of a feasibility study, scheduled for the first half of 2014. It said that any investment decision in the project would come after the completion of this study.

The market has reacted largely positively to the revised project plan, viewing the phased development strategy as one which is more likely to see the project come into production.

“Glencore wants to build this project,” Liberium Capital analyst Richard Knight told Steel First. “It has a strategy of building a foundation in iron ore and it can’t do that without captive mines. The majors won’t sell it enough tonnes.”

The commodities giant said that it was assessing all its development opportunities subject to possible returns and payback profile.

Marketing mix
Australian and Brazilian material makes up more than 60% of Glencore Xstrata’s marketing tonnages, with West African material counting for 20%, and Canada and the rest of the world the remaining 18%.

Sourcing tonnages from the big four producers has helped Glencore boost its iron ore presence.

“Chinese mills are running lean; they can’t carry large stockpiles,” a broker commented. “Glencore buys cargoes from the majors and sells them on at a time which suits it. It has the liquidity to do that.”

About 90% of Glencore’s iron ore marketing tonnes are destined for China, and the company markets a wide mix of products, from fines to pellets.

Derivatives are another aspect of Glencore’s iron ore strategy.

Glencore has been involved in the iron ore futures market since early in its history and, alongside fellow trading companies Cargill, Trafigura and Noble, is responsible for a large proportion of over-the-counter (OTC) traded iron ore volumes.

Gone shopping?
While Glasenberg slashes headcount and costs across the merged business, the market is rumbling with rumours about the next possible Glencore acquisition.

South African miner Anglo American has long been tipped as a possible takeover target for the commodities giant, but the effect of cost overruns at its Minas Rio iron ore project in Brazil – which has a hefty bill of $8.8 billion and growing – could damp its appeal.

With a significant acquisition in any segment of the company likely to compete against Glencore Xstrata’s other businesses, it is unlikely that any buyout which involves taking on “fat” – in the form of additional employee headcount or cumbersome capital expenditure – will win board approval.

“Glencore has done due-diligence on just about every project in the world,” a London-based trader commented. “They know what’s out there.”