Glencore: Down But Not Out Of The Fight

An article in the London Telegraph, reporting on the collapse of Glencore (LONDON:GLEN)’s share price, this week suggests the firm could be in danger of being wiped out by its debt pile. Although the FTSE 100 miner is making efforts to reduce its near £31 billion ($46.98 billion) debt pile by raising fresh equity, closing mines, selling trading inventory and canceling its dividend payment, the newspaper seems to believe it will be too little too late.

Glencore’s shares floated back in 2011 at 530 pence ($8) giving it a market capitalization of £38 billion ($57 billion), at the time. The company used cash raised from investors, in addition to additional debt, to complete the purchase of mining giant Xstrata a year later, but that left it exposed as commodities markets collapsed this year and, in lockstep, so did the company’s share price.

Plenty of Pain to go Around

Not that Glencore is alone. Anglo American PLC (LONDON:AAL), for example, fell in exactly the same manner as investors digested the consequences of a slowing China and overproduction in the industry.

Source: Bloomberg News

But, as of this morning the firm has a market capitalization of a little under £11 billion ($16.5 billion) according to Bloomberg. That’s barely more than half its debt level assuming it manages to achieve the target reduction down to £2 billion ($30 billion). Glencore’s share price has certainly taken a hammering, down 85% this year to under 71 pence ($1.08) and a fraction of its listing price in 2011.

Wealth Evaporation Warnings

Investec (LONDON:INVP) warned its stock could “evaporate” according to one report and certainly the firm’s share price has suffered more than some of its rivals. In July of last year Glencore was at $5.23 per share while Rio Tinto Group (LONDON:RIO) was at $49.28. On Monday, Glencore was down to $1.04, an 80% fall, compared to Rio at $32.07, a drop of 35%.

Indeed, part of the rationale for the relatively high value put on Glencore at its original float was that being both a miner and trader would be a hedge in down times, with trading supporting the more cyclical mining business.

But Glencore Still Has Viable Assets…

Maybe that is still the case and what we are seeing is an overreaction. Investors are known for moving as a herd and the herd is moving out of commodities en masse. It would be a brave soul who said now is a good time to buy, and we wouldn’t be among them, but for those competitors with sufficiently deep pockets, or that could take on a little more debt without being punished as Glencore have been, there will be some bargains to be had as firms seek to divest assets to survive.

Indeed, Glencore is rumored to be looking for a buyer for part or possibly all of its agricultural business, arguably not core to its metal and mining activities, at a price according to the FT that would value the division at some $12 billion.

That valuation may be ambitious in today’s market, but it is considered one of the firm’s crown jewels, so, given time, a buyer could be found. Time though is not on the Glencore’s side; debt-servicing costs must be rising as the perceived risks in dealing with the firm rises.

Rumors of Glencore’s Death are Greatly Exaggerated

Some are speculating Glencore could be taken private again or that a sovereign wealth fund, or similar buyer could appear. Neither are likely, but, in our opinion, equally unlikely is the prospect that the firm will go bust. Most of its assets are cash-generating and profitable even at currently depressed prices.

Market sentiment towards both Glencore and Anglo-American, indeed the sector as a whole, is probably already overdone. Glencore will have to move quickly to raise cash and keep its credit ratings viable, but moving quickly is what Glencore has shown it is able to do in the past.

Retrenching may require a different mindset than being on the acquisition trail, but, really, they are 2 sides of the deal making coin. Deal making has always been Glencore’s specialty. Don’t count them out yet.

by Stuart Burns