LONDON Glencore Xstrata (GLEN.L) took a $7.7 billion hit on mining assets acquired in its takeover of Xstrata, drastically reducing the value of projects in the early stages of development.
The diversified trader and miner announced the writedown as it posted a 9 percent drop in core first-half profit in its first results since completion of a 16-month acquisition that coincided with falling commodity prices across the industry.
Miners have been pummeled by billions of dollars in writedowns since the start of 2013, with cooling mineral prices and demand prospects denting the value of mining projects and boom-year deals.
In absorbing the impact of a weaker market, Glencore wiped out all the goodwill value it had provisionally allocated to Xstrata's mines at the time of the merger.
"We just had to value the business with a blank sheet of paper," Chief Financial Officer Steven Kalmin said, adding that the group had taken a "fairly conservative approach".
Glencore did not break down the impairment, but much of the hit is expected have been down to early-stage projects and so-called greenfield operations - mines built from scratch, which have long been unpopular with Glencore management. These include the $5 billion nickel operation Koniambo in New Caledonia.
The company dismissed the idea that the writedown demonstrated poor timing or an excessive price paid in the all-paper deal for the Xstrata shares it did not already own.
"We took a decision at the time to pay that ratio based on what we knew on that day, and we were happy with it," Chief Executive Ivan Glasenberg said. "We do believe we are going to get it back in time and we do feel comfortable with the deal."
Glencore itself was not immune to falling nickel prices and took a $452 million hit on its legacy Murrin Murrin operation in Australia. Nickel, used in stainless steel, is trading at almost a quarter of pre-crisis highs hit in 2007.
"Equity markets have already de-rated the value of mining assets - share prices are down by a lot since last year, and the book value of Xstrata did not reflect that," Jefferies analyst Chris LaFemina said.
"Other companies had taken writedowns, but Xstrata had not done that yet. It is really just catching up with the industry."
Asset sales are also expected to come out of Glencore's review of Xstrata's assets, but Glasenberg said he was in no rush to sell even the unpopular greenfield projects.
Glencore has already flagged the start of a sale process for $5 billion-plus Peruvian copper mine Las Bambas - demanded by Chinese antitrust regulators - and said on Tuesday that interest was "very strong", mostly from Chinese suitors.
Glencore hopes to close that sale by the end of the year.
Shares in Glencore were down 1.4 percent at 0940 ET, underperforming a 0.8 percent drop in the wider sector, as metal prices fell and miner BHP Billiton (BLT.L) missed its forecasts.
Glencore was hit by weaker prices in the first half, with adjusted core profit - earnings before interest, tax, depreciation and amortization (EBITDA) - down 9 percent at $6 billion, at the higher end of analyst estimates.
Improved output from mining operations in copper and coal helped to cushion the full impact of weaker prices, which took $2.2 billion off Glencore's operating profit.
It also benefited from profit from its trading arm, with adjusted operating profit for marketing alone rising 6 percent to $1.2 billion as metals and profits from trading oil and coal offset the impact of a weaker agricultural contribution.
There was a 39 percent drop at its industrial arm, which includes the group's mines.
Net earnings came in at a little more than $2 billion, down 39 percent on the same period last year.
Glencore's completion of the Xstrata takeover three months ago ended a marathon deal for Glasenberg, whose team now faces the challenge of digesting its biggest acquisition.
The company said that progress on integration was exceeding expectations, with achievable cost savings likely to be "materially" above previous guidance of $500 million a year.
It is still seeking a new chairman, a role currently held by former BP boss Tony Hayward in an interim capacity. Glasenberg said Hayward was a candidate, but Glencore will struggle to appoint the chief executive of a listed company - Hayward is head of oil firm Genel (GENL.L) - to that full-time role.
Glasenberg brushed off questions over his own future at Glencore, where he is also the largest single investor, telling analysts he was "not going anywhere".
Glencore is expected to update the market on the integration, progress and associated cost-savings on September 10.
(Editing by Andrew Callus and David Goodman)