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Glencore ag profits fall, as stake sale nears

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Glencore's agriculture division, in which the group is on the verge of selling a minority stake, suffered a 39% drop in profits last year, hurt by factors from Russia's "punitive" export tax to weaker energy prices.

The commodities giant said that it expected in the April-to-June quarter to seal the sale of a minority stake in its agricultural products division, as part of a disposal programme to raise cash for cutting debt levels Glencore acknowledged had "concerned" investors.

Glencore - which raised to a further $4bn-5bn its target for disposals this year, on top of the $1.6bn already achieved - set a mid-December deadline for bids for a stake in the agriculture business, which it had mulled floating separately too.

The division achieved earnings before interest, tax, depreciation and amortisation (ebitda) of $734m for 2015, a drop of 39% year on year, on revenues down 10.4% at $23.15bn.

'Punitive export tax'

The profits decline was led by a 41% drop in ebitda in the marketing operations, which account for the vast majority of the agriculture division revenues, but which faced a "challenging" environment thanks to "lower prices, lack of volatility and limited arbitrage opportunities".

In Canada, a weaker grains harvest, with wheat output fell by more than 1.8m tonnes last year, undermined results in a country which is a particularly important market for Glencore, thanks to the purchase of grain handler Viterra four years ago.

"Furthermore, 2015 was adversely impacted by the immediate imposition of a punitive wheat export tax in Russia," Glencore said.

'Lack of farmer selling'

In processing, volumes were boosted by the purchases of oilseed crushing plants in Canada and Germany, and 50% of a Brazilian grain handling and port facility, deals which accounted for the great majority of Glencore's $301m spending last year on acquisitions.

In Brazil, cane processing volumes soared by 23% to 520,000 tonnes, "due to significantly improved agricultural yields following the severe drought of 2014".

However, Glencore's ag processing ebitda fell by 30% to $150m, undermined in part by the weakness of the real, which proved a particular setback in profits in Brazilian wheat milling, "as we were unable to pass on the increased cost of imported wheat in Brazilian real terms".

Brazil, while an exporter of the likes of corn and soybeans, is a structural importer of wheat, and particularly of higher protein milling varieties.

Processing profits were also hurt by the dent to the biodiesel market from "regulatory changes and lower competing diesel prices", meaning Glencore's output of the biofuel dropped by 27% to 556,000 tonnes.

And margins on what was produced were also squeezed by the support to rapeseed prices from a weaker European Union harvest last year, and a "lack of farmer selling".

Market reaction

Group ebitda for 2015 fell by 32% to $8.7bn, a result in line with market expectations.

However, net debt at the end of last year, at $25.9bn, was a little ahead of guidance of about $25bn, and shares in Glencore stood 2.0% lower at 130.6p in lunchtime deals in London.

Credit Suisse analysts maintained an "outperform" rating on the shares, saying that "we see 20-30% re-rating potential if the company delivers on its debt reduction targets and driven by the stability and free cash flows from trading".

By Mike Verdin

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