GlencoreXstrata has officially joined the long list of miners inflicting pressure on bottom lines, shelving projects and taking the knife to capital expenditure.
The newly merged miner will shelve is $7 billion Wandoan coal project in Queensland and move to squeeze $US2 billion out of synergies created by the $US34 billion all-share acquisition deal which was finalised in April, making GlencoreXstrata the biggest mining company in the world.
Glencore’s bearish outlook on thermal coal which it said is suffering from effects of coal prices falling below $80 a tonne and higher costs saw Wandoan listed as “on hold” with seven other Australian coal prospects also added to the basket, SMH reports.
''Current price levels are unsustainable in the medium term, with close to 30 per cent of seaborne thermal production being cash-cost negative,'' the company said.
Currently the resources giant exports 120 million tonnes of thermal coal annually, making it the world’s largest thermal coal exporter and with a number of expansions and new projects in the pipeline that number is tipped to increase to 140 million tonnes by 2015, The Australian reports.
Feasibility studies and government approvals processes for the Wandoan thermal coal project which was originally an Xstrata asset were already underway, with the Greenfield asset billed to be the largest open-cut coal mine in the Southern Hemisphere expected to yield 30 million tonnes of coal per annum over three decades.
But GlencoreXstrata boss Ian Glasenberg said the company would no longer be investing in new projects when returns are not assured, explaining projects need to be economically sound to go ahead.
"We are fearful of greenfield projects," Glasenberg said, adding that research demonstrates major resources projects experience cost blow outs of about 35 per cent on average.
Doubts were originally cast over the Wandoan project in March, with Glasenberg telling investors he was in favour of less risky investment decisions.
"We prefer to distance ourselves from greenfield projects which create more risks," Glasenberg said at the time.
Glasenberg at the time also schooled miners on the theory of supply and demand, saying the industry had been saturated with new mines that lead to a surplus in metals and shrinking profits.
“We've always been wanting to keep building and keep putting the cash which we generate into new assets. That's what we've got to stop doing as a mining industry. We've got to learn about demand and supply,” he said.
In March Glasenberg argued that stalling the development of new mines will help prolong higher commodity prices.
The company has already reduced its Australian coal mine workforce by 11 per cent and boosted productivity by 21 per cent over the past year, axing 450 people from its Newlands and Oaky Creek mines, shutting its Brisbane office, and dumping plans to develop a $1 billion coal export terminal on Balaclava Island located 40 kilometres south of Rockhampton in Queensland.
Glencore on Tuesday said it expects synergies to exceed $2 billion for 2014, a significant jump from the $500 million worth of synergies forecasted when the merger was announced last year.
The increased target includes $US1.4 billion of cost savings, which are already filtering through with the closure of 33 Xstrata offices globally, as well as $450 million from marketing synergies and $175 million from financing.
The company has also outlined capital expenditure will be cut by $US3.5 billion over the next two years, explaining it will shift focus towards shareholder returns and implement a culture of careful spending.
Glencore said it has also moved to cut back Xstrata’s project pipeline that it estimates would have cost about $21 billion to complete. Xstrata’s project portfolio consisted of 88 projects, 44 of which have been suspended and seven cut back.