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The Deal: Glencore Xstrata Lifts Merger Synergies Estimate

LONDON (The Deal) -- Glencore Xstrata said it will reap a better-than-expected $2 billion of savings from its formative merger and is in the process of identifying assets for disposal, with the ax expected to fall on early-stage Xstrata projects.

The savings from the merger are four times higher than the estimated $500 million forecast by management when Glencore secured its $34 billion deal for Xstrata earlier this year.

"A significant portion of the synergies are in overhead costs at head and regional offices," Glencore Xstrata CEO Ivan Glasenberg said in a statement ahead of an investor presentation on Tuesday, Sept 10. Glencore Xstrata expects to realize the savings by 2014 and said these are likely to increase as management is "just starting to comprehensively look at the combined mining and metallurgical operations."

Baar, Switzerland-based Glencore Xstrata said that it had made $1.38 billion of cost savings, closing 33 offices, including Xstrata's main offices in Zug, Switzerland,and London. A further $450 million will come from marketing and logistic operations, while $175 million will come from improved credit terms. The increased savings go some way to making up for $7.7 billion of writedowns of Xstrata assets announced on Aug. 22. These ontributed to a half-year loss of nearly $9 billion.

In addition to the cost savings, Glencore Xstrata said it will reduce its project capital expenditure by $3.5 billion, with much of the savings coming from spending cuts at a handful of early-stage Xstrata projects.

Glencore Xstrata said it had "deprioritized" projects, specifically mentioning the Philippines-based Tampakan gold and copper mine, Argentina's El Pachon copper project, the Wandoan thermal coal project in Northeast Australia and Papua New Guinea's Frieda River copper project.

The mining and trading conglomerate is already in the process of selling its Peru-based Las Bambas copper project, which could fetch $5 billion to $7 billion, Barclays analysts noted in July. The sale of Las Bambas was imposed on the group by Chinese regulators in return for their approval of Glencore's acquisition of Xstrata. Chinese buyers are expected to lead the bidding.

"Glencore prefers brownfield and bolt-on M&A," Glasenberg told the investor conference. "Further divestments are likely to result from the on-going industrial asset portfolio review."