Glencore Xstrata told investors on Friday it would return excess cash, slash costs and might sell unwanted assets, raising expectations it would easily exceed planned synergies of $500 million from the deal that created the new group.
Unveiling a management team packed with veteran Glencore executives, the group promised to "cut bureaucracy and duplication", vowing it would reduce administrative staff, cut divisional offices and underperforming projects to ensure success even at a time of cooling commodity prices.
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Mining mega-deals have had a mixed record of success at best over the past decade, but a day after Glencore sealed the acquisition of Xstrata, the biggest ever takeover in the sector, its shares soared 6 percent, helped by a jump in the copper price. At current prices the group is worth $73 billion.
"If we can cut costs enough, get rid of these corporate head offices, we can cut a lot of fat out of the system. These synergies and overhead reductions - that figure can ensure this merger is a success," CEO Ivan Glasenberg said in an interview.
"The target of $500 million is only the synergies on the trading operations. When we came up with that figure we had no idea what the overheads were in Xstrata ... and it wasn't a takeover at that time."
He said additional savings would be "substantial" as Xstrata itself had said it could cut $300 million of administration costs on top of trading savings - a number Glasenberg referred to as "low-hanging fruit".
In slides to accompany a presentation to investors on Friday, Glencore said its previously announced $500 million of synergies in the first full year would be "comfortably met". Analysts expect a figure of at least double the original amount.
But for all the talk of cuts and the potential for sales, Glencore and its management team face the biggest challenge since the trader was set up almost four decades ago - integrating a $46 billion miner as the cycle turns, and running Xstrata's assets with only one of the group's key executives.
Leaving little doubt that what was a merger of equals has ended as a takeover, just 2 of 14 top divisional jobs will be taken by Xstrata managers - Peter Freyberg running coal mining and Mark Eames in charge of iron ore projects. Coal trading will remain the preserve of Glencore's Tor Peterson.
Glasenberg brushed off concerns about the Glencore team's ability to run Xstrata's mines, telling analysts "no asset will fall through the cracks", and pointing to Xstrata's Freyberg at the head of the most complex division - coal. Freyberg joined Xstrata after it bought Glencore's coal assets a decade ago.
Glencore's ebullient veteran Telis Mistakidis will run the key copper division, including mining and trading.
Copper alone accounted for more than half Xstrata profit, but Glencore dismissed concerns it could be over-stretching in copper - given a high proportion of joint ventures - and brushed off worries about further Xstrata departures at its mines.
Glasenberg said he had no plans to bring in retention packages for key operating staff at Xstrata's mines and had no concerns in an environment where most majors are cutting back.
"I am getting more CVs than I have ever seen in this company," he said, adding performance would be "well rewarded".
The group will now take until the third quarter to carry out a full 100-day review on Xstrata's mines and plants, which could result in the sale of early-stage "greenfield" projects - developments built from scratch where costs in recent years have soared. Signaling its tough stance on value, Glencore set its target return on equity for new projects at 20 to 25 percent.
Glasenberg said it was not an ideal time to sell assets and Glencore could keep projects that were not "sucking a lot of money out of the business".
"We are not desperate to sell assets," he said. "Glencore will not be selling assets at the wrong time in the cycle."
Most analysts, however, expect cuts to Xstrata's pipeline.
It has not yet begun the process of selling Xstrata's Las Bambas, the $5.2 billion Peruvian mine it has to divest to satisfy Chinese regulators, but the group's chief financial officer Steven Kalmin said he expected Chinese interest.
The group, almost 25 percent owned by its managers, also promised it would return excess capital to shareholders through regular and special dividends, or share buybacks - a sensitive subject for investors who have long complained of mining companies' low dividend yields.
"We don't want excess capital to be sitting here, burning a hole, tempting us to ... do something that is not consistent with what we have said on capital discipline," Kalmin said.
"The ability to increase payout ratios and cash is clearly going to be there once this current capex cliff begins tailing off ... into 2015," he added, referring to a drop off in planned spending, which begins in 2013 and accelerates.
While Glencore remains opportunistic and Glasenberg did not exclude the possibility of M&A deals, he said there were no targets on the horizon.
"We just want to sit tight right now. The priority is to get this integration in the right place."
($1 = 0.6447 British pounds)
(Reporting by Clara Ferreira-Marques; Editing by Janet McBride and Will Waterman)