Glencore Xstrata (Price: 314p | Target: 303p | Rec: Reduce) Las Bambas sale agreed, to a consortium led by MMG Ltd (1208 HK).

We believe the agreed price is at the upper end of market expectations of US$5-6bn.

The consortium will also pay all capex and development costs incurred from 1 January 2014 until transaction close by end of Q3.

Around US$400m has been spent this year, and we assume the company will spend the same again until it sells the asset (budgeted US$1.8bn capex for the year).

The transaction is subject to regulatory approvals (including MOFCOM) as well as MMG Ltd shareholder approval. * We have updated our numbers accordingly, adding 3p to our TP, having previously assumed a sale price of US$5.5bn.

Until the transaction is finalised, we would expect the Glencore Xstrata to be cautious on advancing new significant transactions in order to ensure the company’s credit rating remains unchanged and the balance sheet doesn’t come under undue pressure, particularly against the background of volatile commodity pricing. * Management has previously indicated that the funds could be applied toward funding other opportunities, de-leveraging, share buybacks, and possibly rebasing the dividend.

Possible transaction opportunities could include Rio’s Hunter Valley Coal assets, or oil opportunities such as onshore assets in Nigeria which has previously been mentioned in the press. * In our view the key positive is reducing the balance sheet risk against the threat of weaker earnings from depressed commodity prices, particularly coal and copper, in the short to medium term.

Glencore is keen to ensure that it keeps its BBB credit rating in order to ensure cost of debt doesn’t become excessive (US$55bn gross debt at end Dec 13). * Our TP (303p) reflects a combination of NPV, P/E and dividend multiples over a two year period.

Key risks are commodity prices and operational issues.
To access the full note please click here Analyst: Marc Elliott +44 (0)20 7597 5189
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