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Veteran sharemarket hands have a saying that the right multiple for profits made from trading is zero: that is because there can never be a guarantee that the profits made from trading last year will be repeated this year. And it doesn't matter what is being traded – shares, bonds, commodities or currencies.
Lesson from Glencore: beware of high-flying traders
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/z/4/z/q/image.related.afrArticleLead.620x350.gk177n.png/1444104533276.jpg[/img]Ivan Glasenberg, CEO, Glencore International. Bloomberg
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by Trevor Sykes
The collapse in the Glencore share price has driven home an old lesson: it always pays to be wary of profits made from trading.
Veteran sharemarket hands have a saying that the right multiple for profits made from trading is zero: that is because there can never be a guarantee that the profits made from trading last year will be repeated this year. And it doesn't matter what is being traded – shares, bonds, commodities or currencies.
Financial history is littered with the bones of great traders who suddenly became great loss-makers – usually because they began believing that techniques which had made profits in the past would always work in the future. In other words, they didn't change their game when the game had changed.
Consider the fate of Gollin & Co, which was one of the oldest and proudest companies in Australia until it began making significant profits in the 1960s from Asian steel trading on the initiative of Keith Gale, the bright, personable young manager of its Tokyo office.
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Gale was made managing director in 1972 and expanded the group's Asian trading further, but in the last quarter of 1974, steel demand suddenly dropped worldwide.
The collapse caught Gollin overexposed and overgeared, with debts totalled nearly $80 million against net assets of only $18.9 million. Gollin struggled on for a while, but eventually went into liquidation with losses totalling an estimated $120 million in 1977: the largest in Australian history at the time.
Without forecasting such a dire fate for Glencore, its fundamental problems look similar to those of Gollin, with a few noughts added.
The Swiss-based Glencore has long been one of the world's most successful resource groups, differing from the other resource giants because it not only produces commodities: it also trades them, and it is difficult to track the performance of a trading house because its fortunes can vary daily.
On August 19 Glencore announced a loss for the June half of $US817 million after writing its assets down by $US1.56 billion.
The interim balance sheet was roughly in line with a year earlier, showing total assets of $US148 billion, net assets of $US48 billion and gross debt of $US50 billion. The London Stock Exchange (LSE) must have been fairly well braced for a poor result, because Glencore shares, which had been £3.14 at the start of May, were down to £1.76 when the interim result was announced.
Glencore said it was pruning costs by some $US3 billion to strengthen its finances in the challenging conditions. Given that the interim financial report comprised 80 pages of detail, shareholders were entitled to believe they had received all the bad news.
MORE SHOCKS TO COME
But they hadn't, because a mere 19 days later Glencore announced a further $US10 billion package to buttress its finances. Dividends were cancelled, saving $US2.4 billion. Capex, loans and working capital were all slashed, and an equity issue would raise up to $US2.5 billion.
When a company makes a shock announcement such as that, investors are entitled to suspect that the interim report didn't tell the whole truth. Certainly Glencore seemed to be in much more trouble than it had indicated less than three weeks earlier.
Rumours began swirling that Glencore was losing money on very large trading positions. Worse still, London analyst Hunter Hillcoat of Investec produced a note speculating that if commodity prices stayed at current levels, Glencore's equity value could be wiped out.
That crunched Glencore shares as low as 68p. They have since returned to 95p. Glencore has issued a further statement saying it had "absolutely no insolvency issues". Maybe it hasn't, but it will take some time to be sure.
The moral is that much can go wrong in a big trading house before the problems become evident (Sons of Gwalia is an example).
Traders need a very sensitive antenna for sudden swings in markets. They need to know when to be nervous and when to be bold, and to be nimble enough to switch. Men with these gifts are rare and that is why great trading houses arise so seldom.
Glasenberg sticks to the script on another roller-coaster day for Glencore.
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Banks' Glencore exposure is a $US100b gorilla, says BofA
DateOctober 8, 2015 - 1:17PM
Stephen Morris
Global financial firms' estimated $US100 billion ($139 billion) or more exposure to Glencore Plc may draw more scrutiny as regulatory stress tests approach after the commodity giant's stock plunge this year, according to Bank of America.
Bank shareholders and regulators may be concerned that Glencore's debt and trade finance deals, of which a "significant majority" are unsecured, will reveal higher than expected risk and require more capital once the lenders are put through US and UK stress tests, BofA analysts said on Wednesday.
Adding an estimated $US50 billion of committed lines to the company's own reported gross debt, the analysts say financial firms' exposure may be three times larger than Glencore's reported adjusted net debt of less than $US30 billion.
"The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market," analysts, including Alastair Ryan and Michael Helsby, said in a note titled "The $100 billion gorilla in the room".
The commodity-price bust and "stress in Glencore's share price and debt spreads may spur a review by investors, supervisors and bank management", while "bank shareholders may pressure managements to reduce exposures", they said.
Loans to the industry have come under scrutiny as the prices of oil, copper and other commodities fell to their lowest levels in 16 years amid weakening demand from China.
Glencore,the Swiss producer and trader of commodities led by billionaire Ivan Glasenberg, has pledged to cut debt by $US10 billion and revealed more detail about its financing to mollify investors. On December 1, the Bank of England releases its second round of stress tests, in which it has pledged to examine UK banks' commodities exposure.
Glencore spokesman Charles Watenphul declined to comment on the BofA report. Mr Glasenberg told staff last week the company had $US13.5 billion of available liquidity and the company "will emerge even stronger".
Stress tests
The shares climbed 6 per cent to 124.8 pence at 1pm in London and have almost doubled from their low on September 28, when Investec analysts wrote there may be little equity value in Glencore if low commodity prices persist. Trading was briefly halted due to volatility twice on Tuesday and the stockposted its biggest gain ever on Monday, though it is still down by more than 50 per cent in 2015.
"Gross exposures will be considered by regulators in upcoming stress tests" as opposed to banks' net exposure, which can be offset by hedging, BofA said. "Many banks may now be more carefully reviewing their exposure to the commodities complex."
The analysts criticised the lack of disclosure from banks about their commodity lending, but predict a change in policy to calm fears.
"We believe the numbers are big enough that banks will need to use third-quarter disclosure to alleviate what we believe will be building investor concerns," Mr Ryan and Mr Helsby said.
Balance sheet
On Tuesday, Glencore released a document explaining its financing, reiterating much information that was already public knowledge, in response to recent criticism of a trading business that some have labelled a "black box". Glencore has argued that its secured trade-financing from banks is of a high quality and has a low rate of default.
"Losses on trade finance portfolios historically have been low," the Paris-based International Chamber of Commerce said last year, citing a report from the Bank for International Settlements. "Moreover, given their short-term nature, banks have been able to quickly reduce their exposures in times of stress."
Glencore has $US35 billion in bonds, $US9 billion in bank borrowings, $US8 billion in available drawings and $US1 billion in secured borrowings, in addition to $US50 billion in committed credit lines, against which it draws letters of credit to finance trading, according to BofA. That compares with more than $US90 billion in property, plant, equipment and inventories.
Standard Chartered
More than 60 banks participated in Glencore's $US15.25 billion revolving credit facility raised in May, and the broad syndication of the debt means that credit issues "would not likely be existential for any individual bank," the analysts said.
Standard Chartered, which has also been battered by the commodity rout, has the greatest exposure to commodity traders among European banks, with $US1.9 billion of syndicated loans, including more than $US1 billion of loans and credit lines to Trafigura, Sanford C. Bernstein said on October 5. Credit Agricole has the largest exposure of any bank to Glencore at $US841 million, followed by HSBC Holdings with $US658 million, analyst Chirantan Barua said.
Peter Grauer, the chairman of Bloomberg, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.
Bloomberg
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Ha, with 60 banks in 1 single syndicated RCF of USD15.25b - i.e. likely many are just doing name-lending! - under the guidance of 1 or 2 lead manager or agent bank, this appears the seeds have been sowed for a likely emerging scenario of an ineffective UN-type group of banks in misery who need company!! With Glencore now under tremendous financial stress, if the agent bank is unable or unwilling to play an effective leadership role, the bank syndicate could be in trouble. If some banks in the syndicate have changed their minds about Glencore and want a quick exit, the bank syndicate could be in trouble.
Better avoid Glencore and its big bank lenders and bond holders until a clear, blue sky emerges again!
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Glencore debt reduction: CSA mine falls victim to debt clampdown
Barry FitzGerald
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Resources Editor
Melbourne
[Image: 660918-fe0a4ae2-70b8-11e5-ba96-95f70c84c9e6.jpg]
Glencore’s historic CSA copper mine at Cobar in central western NSW. Source: Getty Images
[b]The asset sales component of Glencore’s drastic debt reduction drive has been expanded to include two of its lesser copper assets, the historic CSA mine at Cobar in central western NSW and the Lomas Bayas mine in Chile’s Atacama desert.[/b]
The planned sale of the mines adds to the pending $US2 billion ($2.72bn) in asset sales announced on September 7 as part of Glencore’s initial $US10.2bn debt reduction plan — a response to the free fall in its shares because of concerns its $US50bn debt load across its mining and commodities trading businesses was too hot to handle in the weaker price environment.
The CSA mine — it historically stood for the Cornish, Scottish and Australian mine — has been an on and off producer since the 1870s. It employs more than 300 workers who have been told that during the sale process, being handled by Bank of America and UBS, that it will be business as usual.
The mine is a high-grade producer from depths of 1600m, with annual production running at about 50,000 tonnes. Before Glencore reopened the mine in 1999 there was a difficult period under Ashanti Goldfields and before that, happier times under Golden Shamrock and CRA.
Lomas Bayas is a 75,000-tonne-a-year copper producer from low-grade ores located about 120km northeast of the port of Antofagasta in northern Chile.
Both CSA and Lomas Bayas will have appeal to an array of mid-tier copper producers looking to seize growth opportunities at a time when the pressure has come off asking prices because of the fall in copper prices to six-year lows.
Private equity groups are also expected to show interest. Owen Hegarty’s private equity resources group EMR Capital reflected the interest of PE groups in the sector with its recent $45 million deal to buy the mothballed Mount Gordon copper mine in Queensland.
A former senior CRA (now Rio Tinto) executive, Mr Hegarty teamed up with another private equity group, Paul Espie’s Pacific Road, in a management buyout of the operation in conjunction with Golden Shamrock’s acquisition of the project from CRA.
He was unaware yesterday the CSA mine was back on the market but said he was always interested in good copper assets.
Glencore told the London market that it had received a number of expressions of interests in the CSA and Lomas Bayas mines. “This will allow potential buyers to bid to purchase either one or both of the mines and may or may not result in a sale,’’ Glencore said.
The potential sale of the two mines is on top of the $US2bn garage sale of assets Glencore announced on September 7. It did specify assets involved at the time but did say the $US2bn would include a minority position in its agriculture business in which has a major presence in Australia, and a “streaming’’ transaction involving upfront cash for precious metal byproduct production at its mines.
The potential of streaming transactions to surprise on the upside was highlighted last week in a silver streaming deal between Canada’s Teck and the royalty company Franco-Nevada. The deal was over Teck’s 22.5 per cent interest in the big Antamina copper/zinc/silver mine in Peru, owned 33.75 per cent by each of BHP Billiton and Glencore, and 10 per cent by Japan’s Mitsubishi.
Franco-Nevada is to make an upfront payment of $US610m to Teck and will pay 5 per cent of the spot price at the time of delivery for each ounce of silver. In return, Franco-Nevada gets the equivalent of 22.5 per cent of silver sold by Antamina. After 86 million ounces, the stream will be reduced by one third.
Canaccord analysts said that on the same terms, Glencore would get $US915m upfront for its bigger Antamina interest (as would BHP). “This values, in our view, the full potential precious metals stream from the company’s South American copper assets at between $US1.5bn and $US1.8bn,’’ Canaccord said.
Glencore’s September 7 debt reduction plan had the desired effect of halting the group’s share price collapse although the stock remains down 55 per for the year. Other measures in that initial plan included the closure of 400,000 tonnes of African copper production and a $US2.5bn equity issue. Further measures emerged on Friday when Glencore rocked the industry by announcing the loss of 535 jobs at its zinc operations in Queensland and the Northern Territory as part of a 500,000 tonne-a-year or one-third cut in its global production of the ailing galvanising and alloying metal.
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Glencore plans more debt cuts to help win credit upgrade
- SCOTT PATTERSON
- THE WALL STREET JOURNAL
- OCTOBER 16, 2015 7:06AM
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The debt-reduction plan shows Glencore is steeling for a worse commodity rout than that expected by Ivan Glasenberg. Source: Supplied
[b]Executives at Glencore are cobbling together a plan they hope will result in a credit-rating upgrade, people familiar with the embattled company’s effort said, a previously undisclosed part of the firm’s attempt to strengthen its balance sheet.[/b]
The Swiss mining and trading giant, whose stock has been buffeted by investor concerns over its highly leveraged balance sheet, has said it would reduce net debt by $US10 billion, bringing it down to about $US20 billion. But the company’s plans to raise cash through streaming deals, asset sales and other moves could potentially cut more than $US12 billion, putting its net debt at about $US18 billion.
With those reductions, Glencore is targeting a credit rating that would put its debt three or four notches above junk status, a person familiar with the matter said. Glencore wants a strong investment-grade rating, said a different person close to the company.
Glencore’s debt currently is ranked two notches above the lowly junk characterisation. Moody’s Investors Service and Standard & Poor’s have put Glencore on a negative watch, raising the possibility of a ratings downgrade if commodity prices worsen.
The focus on Glencore’s debt highlights the uneasy balance between its trading division and its mining arm. Founded as a trading company, its executives had long maintained it didn’t need high credit ratings, as its credit was mostly short-term and backed by the assets it shipped.
When Glencore became a mining force with its 2013 acquisition of Xstrata, it acquired $US15 billion in long-term debt and became the most indebted of the world’s biggest miners. Its BBB credit rating, which is high for the trading industry, became a liability in a world of largely A-rated mining giants and volatile commodities prices.
Glencore’s share price has been hammered, falling 60 per cent this year, including 29 per cent in one day last month, as investors worry about its high debt and a credit rating that is lower than its competitors. Rio Tinto and BHP Billiton each have ratings above “A” and $US13.7 billion and $US24.4 billion in net debt, respectively.
In September, Moody’s called a Glencore upgrade “unlikely given the negative outlook,” but added one was possible if the company’s debt was brought “sustainably” to less than two and a half times earnings before interest, taxes, depreciation and amortisation. It would, in theory, hit that target if the company reduced its debt to $US18 billion to $US20 billion, with roughly $US9 billion in EBITDA expected this year and next, though that profit figure is based on current commodity prices, which some experts say will fall.
It isn’t assured that Glencore will achieve all its debt-reduction goals, and its asset sales might not get as much as the company is aiming for. A ratings upgrade could rely on earnings from its mining division performing better than some sceptics expect — a difficult goal in a period of depressed commodity prices for nearly everything the company sells.
The more ambitious debt-reduction plan shows Glencore is steeling its balance sheet for a worse commodity rout than that expected by its chief executive, Ivan Glasenberg, people familiar with the situation said.
In a series of meetings this past summer, after Glencore posted lacklustre first-half results, investors told the company they were concerned that if the copper price dropped another 20 per cent or so to $4000 a tonne, it could face ratings downgrades and resulting financial issues.
Mr Glasenberg has said repeatedly in recent months that he doubted copper, among Glencore’s most important commodities, would fall so low. But he has agreed to the $US10 billion in debt cuts to protect the balance sheet from what executives called a doomsday scenario.
Slashing debt by $US12 billion could happen a number of ways. Some of it would come from asset sales and precious-metals streaming deals, in which the company agrees to provide a stream of gold or silver to another firm in exchange for an upfront payment of cash. Glencore said in September that it expects to get $US2 billion from the sale of assets and streaming deals. But bankers familiar with the company say it could get as much as $US1.5 billion from streaming deals and $US3 billion from asset sales.
That would come on top of $US2.5 billion Glencore raised from the sale of shares and the $US2.4 billion it expects to save by cutting dividends. The company has said it also expects to save $US1 billion to $US1.8 billion from reducing long-term loans and advances and spending cuts, and about $US1.5 billion from cuts in working capital.
The bulk of the cash from asset sales is likely to come from the sale of 30 per cent to 40 per cent of Glencore’s agriculture business, which could fetch between $US2 billion and $US3 billion, according to the people familiar with the discussions. The company earlier this week said it is also looking to sell two copper mines — including the historic CSA mine at Cobar in NSW — deals analysts say could raise more than $US1 billion.
Glencore is also seeking buyers for some of its oil-and-gas assets, people familiar with the discussions said, though it isn’t clear how much the company could raise. A person familiar with the situation said the oil-and-gas asset sales would likely be small.
Commodity prices remain a key uncertainty, with the copper price falling to multiyear lows in August to $US4,968 a tonne.
Jeffrey Currie, global head of commodities research at Goldman Sachs Group Inc., said at a media round table in London overnight (AEDT) that he expects the copper price to fall to $4200 a tonne by the end of 2016. The researcher said prices for the industrial metal haven’t fallen below how much it costs to produce a ton — in the “low $4000 a tonne” range, he says, but miners aren’t taking enough capacity out of production to buttress prices. “Copper is the most overvalued (commodity) and you want to be short copper,” Mr Currie said.
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OZ Minerals eyes Glencore copper mine
Bridget Carter
[Image: bridget_carter.png]
Mergers & Acquisitions Editor
Sydney
Gretchen Friemann
[Image: gretchen_friemann.png]
Mergers & Acquisitions Editor
Sydney
[Image: 120273-46d7b458-8063-11e5-970a-9231c6de7a20.jpg]
Dataroom Source: TheAustralian
[b]The sales process for Glencore’s $1 billion-plus copper mines has attracted a strong field of prospective buyers, with OZ Minerals, along with Chinese parties, expressing an interest.[/b]
OZ Minerals’ interest extends to Glencore’s NSW copper mine CSA, which is expected to sell for several hundred million dollars.
CSA is also on the radar of Zijin out of China, along with Glencore’s more valuable Chilean mine, Lomas Bayas.
Zijin looked at Newcrest’s Telfer gold mine in Western Australia when it was put up for sale for a brief period this year and purchased a half share in Barrick Gold’s Porgera goldmine in PNG for $US298m.
Glencore’s divestment through advisers Bank of America Merrill Lynch and UBS comes as the global coalminer attempts to slash its $US10bn debt amid tough industry conditions.
Copper is currently a resource that remains more popular than coal and is considered to be more resilient.
Other parties that are understood to have made approaches for CSA are PanAust, which is now owned by Guangdong Rising Assets Management of China, Sandfire Resources and China Moly.
However, OZ Minerals, which counts global private equity giant Kohlberg Kravis Roberts as an investor, is a logical candidate given the Australian-listed mining company’s focus on copper.
Meanwhile, there was renewed talk late last week about whether BHP Billiton was perhaps once again considering an acquisition of the $24bn oil and gas giant Woodside Petroleum.
It is a possibility that has been speculated about for years and was largely played down by analysts on Friday who said that it flew in the face of BHP’s recent trend of cutting back spending in oil and gas.
Still, some believe it is a possibility not to be dismissed outright.
Some are promoting the merits of such a deal as a way for BHP to capitalise on Woodside’s weaker share price and buy cash flow to fund its progressive dividend payments.
BHP could also use Woodside to develop its northwest shelf venture.
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Glencore sells silver to pay off debt
Barry FitzGerald
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Resources Editor
Melbourne
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The sale gives a kick-along to Glencore’s $US10.2bn debt-reduction program Source: Bloomberg
[b]Glencore is selling a big chunk of the family silver to help get itself out of a debt hole.[/b]
The Anglo-Swiss miner and commodities trader is to pull in $US900 million ($1.24 billion) from the forward sale of by-product silver output from its share of the Antamina copper/zinc mine in Peru.
The sale gives a kick-along to its drastic $US10.2bn debt-reduction program, announced on September 7 against a backdrop of a collapsing share price.
US “streaming” specialist Silver Wheaton is to advance Glencore the $US900m as an advance on the right to buy the equivalent of the company’s 33.75 per cent share of Antamina silver output (4.7 million ounces a year) at 20 per cent of the spot price of silver ($US15.20 an ounce), up to 140 million ounces.
The actual silver will be sourced elsewhere by Glencore as the silver produced at Antamina — BHP Billiton also has a 33.75 per cent interest — is locked up in the concentrates sold by the mine.
After 140 million ounces of silver have been delivered under the streaming agreement (it exceeds current mine-life expectations by 16 years), the stream will be reduced to the equivalent of 22.5 per cent of the silver produced at the mine that sits at altitude in the Andes.
Antamina is one of the world’s best copper mines — due in large part to credits its gets for the zinc and silver contained in the massive orebody. The streaming deal by Glencore necessarily reduces the value of its 33.75 per cent stake.
But it does allow a partial quick fix to its debt woes that came to a head in September when the group’s share price was in free fall because of fears its $US30bn debt load had become untenable in the wake of the commodities price rout.
The 22.5 per cent Antamina partner, Canada’s Teck, had previously announced a streaming deal with US streaming and royalty group Franco Nevada, which involved an upfront payment of $US610m.
Canaccord analysts said at the time that on the same terms, Glencore would receive $US915m upfront, indicating the resources group got close to full value in its deal with Silver Wheaton. There had been a fear that as a pressured seller Glencore might have had to settle for less on an imputed value basis.
Asset sales by Glencore as part of its debt-reduction drive were last month expanded to include two of its lesser copper assets, the historic CSA mine at Cobar in central western NSW and the Lomas Bayas mine in Chile’s Atacama desert.
Glencore’s September 7 debt- reduction plan had the desired effect of halting the group’s share price collapse, although the stock remains down 62 per for the year to date. Other measures in that initial plan, or announced since, have included the closure of 400,000 tonnes of African copper production and a third of Glencore’s global zinc production.
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Trading rebound puts Glencore profit target in sight
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/j/x/i/2/4/image.related.afrArticleLead.620x350.gkr24x.png/1446669258425.jpg[/img]Glencore chief executive Ivan Glasenberg has been shuttering coal, copper and zinc mines in a bid to combat a rout in prices that's sapping profits. Simon Dawson
by Jesse Riseborough
Glencore said profit from trading commodities rebounded, putting the embattled miner on course to hit its full-year earnings target for the division as it weathers a rout in prices. The shares rallied to their highest in almost a month.
Adjusted earnings before interest and tax will be $US2.5 billion ($3.48 billion) to $US2.6 billion for this year, Glencore said in a statement, reiterating an August forecast. JPMorgan Chase analysts said this was "significantly better" than its estimate of $US2.24 billion.
Third-quarter trading was stronger and there were "improved contributions from metals and minerals and agricultural products," it said. The producer also said it will cut an additional 55,000 metric tons of copper output by the end of 2017.
Glencore, weighed down by a $US30 billion debt load, also outlined a new goal to trim borrowings by $US5 billion to $US25 billion by the end of the year while at the same time targeting net funding of $US40 billion. Chief executive Ivan Glasenberg has been shuttering coal, copper and zinc mines in a bid to combat a rout in prices that's sapping profits for the biggest miners.
"The company has suffered a sharp drop in confidence," Liam Fitzpatrick, Credit Suisse analyst who has an outperform rating on the stock, wrote in a note. "Concerns over marketing and industrial earnings are overdone and net debt should fall rapidly through operating cash flows and divestments. We expect marketing to remain a cash cow."
In its first-half results in August, Glencore reported a 29 per cent drop in its adjusted earnings before interest and tax from its trading business to $US1.07 billion. The company cut its full-year forecast then to $US2.5 billion to $US2.6 billion, down from $US2.7 billion to $US3.7 billion previously.
The Switzerland-based company said late on Tuesday that it had sold a share of its future silver output from its Antamina mine to Silver Wheaton in a deal that includes a $US900 million upfront payment.
The stock has climbed 83 per cent since plunging to a record low on Sept. 28, after the company moved to alleviate investor concerns about its ability to curb its debt load.
Glencore rose 5.4 per cent to close at 125.85 pence in London after earlier rising as much as 8.8 per cent. The shares have tumbled 58 per cent this year, the worst performance on the FTSE 100 Index. Rival Anglo American has plunged 52 per cent this year.
The world's biggest mining companies are seeing profits narrow amid slowing economic growth in China, the largest commodities buyer. That's reducing demand for raw materials and adding to oversupplies. Copper has dropped about 18 per cent this year on the London Metal Exchange and reached a six-year low in August.
Glencore said it has repaid three bonds amounting to $US1.95 billion since the end of the third quarter and repurchased a further $US400 million of bonds.
In September, Glencore said it would cut copper production from mines in Zambia and the Democratic Republic of Congo by 400,000 tons. It has now raised that estimate to 455,000 tons, and said the shutdowns have been implemented and that there would not be any incremental output in 2015 or 2016.
Copper output from its mines rose 1 per cent to 396,600 tons in the three months through September, from 391,300 tons a year earlier, it said. The company, the biggest shipper of power- plant coal, said total production of the fuel fell 15 per cent to 34 million tons in the period.
Peter Grauer, the chairman of Bloomberg LP is a senior independent non-executive director at Glencore.
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Glencore’s long road to recovery
Stephen Bartholomeusz
[Image: stephen_bartholomeusz.png]
Business Spectator Columnist
Melbourne
[b]Ivan Glasenberg and his team at Glencore have been galvanised by the warning klaxon that sounded very loudly last month, when Glencore’s share price imploded, falling almost 30 per cent in a day.[/b]
Where others might have tried to convince the market that it had got it wrong — an approach that generally doesn’t work — Glasenberg has acted.
He’s raised equity, suspended dividends, started selling assets, appears to be rapidly reducing the inventory levels in the group’s trading operations and announced big cuts to its coal, zinc and lead production. He’s also started buying back Glencore debt that was trading at crisis-driven discounts to its face value.
Last night’s trading update provided evidence of the frenzy of activity Glencore has been engaged in over the past couple of months as concerns about its debt levels reached crisis levels.
The group raised $US2.5 billion of equity in September and saved itself $US2.4bn of cash by axing its final dividend for this year and its interim dividend for 2016.
This week it raised $US900 million through a ‘streaming’ agreement with Silver Wheaton that effectively sees it selling most of the silver it will receive in future from its 33.75 per cent of the Antamina mine in Peru, one of the largest copper/zinc mines in the world.
In the update it said another streaming deal is expected to be announced before the end of the year. There has been speculation of a deal covering Glencore’s future gold production which, like silver, is regarded as a byproduct of its core commodity exposures. There are some estimates that it could raise a further $US1bn or more from a gold streaming deal.
The group is engaged in a sales process for a minority stake in its agriculture business, one of the world’s largest, and also has its Cobar (NSW) and Lomas Bayas (Chile) copper mines.
By the end of next year it is targeting a reduction in its net debt of about $US30bn into the “low $US20bn” range as a result of the range of actions it has taken.
It was the $US30bn of net debt in its core commodity businesses and the $US20bn more than funds the inventories in its trading operations that alarmed the market last month.
It would appear that, apart from planning to carve up to $US10bn off its core net debt, Glencore is also starting to shrink the inventories it holds for its trading operations and therefore the short term funding associated with them.
It said overnight that it is now targeting net funding and net debt of about $US40bn and $US25bn respectively by the end of the year, down from the $US50bn overall debt and $US30bn of core net debt that was in its balance sheet midyear.
The equity issue, the run-down in inventories and a focus on working capital are reflected in higher levels of liquidity, with Glencore saying it had committed liquidity of $US13.8bn at 30 September compared with $US10.5bn at June 30.
Glencore (like Fortescue in this market) is also opportunistically buying back debt, with $US400m of bonds repurchased. Another $US1.95bn of bonds were repaid.
Thus, the group is making more rapid progress than expected in its dash for a balance sheet more suitably positioned for the ‘lower for longer’ commodity price outlook that is now the general consensus in the sector.
The silver streaming deal struck this week, and the other being negotiated, signals that Glasenberg understands that the group’s balance sheet is the absolute priority. He’s prepared to sell-off future cash flows and earnings streams and potential upside to shore up the group today. Given the potential for further falls in prices within the group’s core exposures to coal and copper, that’s a prudent and pragmatic course.
The other positive disclosure in the Glencore update was that its marketing operations, which generated a disappointing $US1.1bn in the first half, had a stronger September quarter, enabling the group to reiterate its full-year guidance of $US2.5bn to $US2.6bn of earnings before interest and tax for the division.
Glencore shares have risen more than 80 per cent from last month’s low, thanks to the urgency with which Glasenberg responded to the markets vote of no confidence in its balance sheet. They remain, however, at levels (despite a 5.5 per cent rise overnight) about 60 per cent lower than only six months ago.
The progress of the rehabilitation of Glencore’s balance sheet and its relationship with investors might be encouraging, but it remains very much a longer term work-in-progress.
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Glencore's reprieve looks shaky as stock drops
DateNovember 19, 2015 - 8:50AM
Jesse Riseborough
[Image: 1447883415861.jpg]
Ivan Glasenberg: "Over the decades he's got more right than he's got wrong," says Deutsche Bank. Photo: Bloomberg
For a while it looked like Glencore had turned the tide.
Billionaire chief executive officer Ivan Glasenberg's $US10 billion ($14 billion) debt-cutting plan, vivified with asset sales and output cuts, breathed life into a collapsing share price. Now with the stock falling again, pressure is back on to drive those efforts harder and faster.
Before yesterday, the Swiss firm had dropped for nine straight days in London, the longest streak on record. The 29 per cent slump in that period, as prices for the copper and zinc that Glencore produces reached six-year lows, wiped about $US8 billion off the mining and trading company's value.
"If all else remains unchanged, it's going to be back to the drawing board," said Marc Elliott, the mining analyst at Investec whose bearish research note seven weeks ago was a spur for a record daily decline in Glencore's shares. "Perhaps not to the same degree, but they're going to have to take more action." Elliott advises investors to sell.
Glencore has lost $US45 billion in market value this year amid a commodities rout that's crushing prices from aluminum to oil and tin, presenting Glasenberg with his greatest challenge since becoming CEO in 2002. While he's hitting debt-cutting milestones - a $US2.5 billion share sale, a $US900 million asset disposal, $US2.4 billion saved by halting dividends, progress offloading a stake in the company's agriculture business - the question is whether tumbling demand in China, the biggest commodity consumer, won't overcome all endeavors.
Glasenberg cleared one hurdle on September 28, when the stock tanked 29 per cent as Investec questioned whether weak metals prices would erase Glencore's equity value. The shares recouped all their losses within a week and headed higher on a flurry of statements on cutting mine output and selling assets, as well as calming words on the producer's solvency.
Double value
At one point, the stock more than doubled its value from the nadir. But for all his efforts and undoubted talents, even Glasenberg can't hold back the sea. As long as prices for the commodities that Glencore mines keep sliding, the weakness will play out in its shares. Glencore's shares in London fell as much as 3.5 per cent on Wednesday, the lowest intraday level since September 30, before rebounding to close 5 per cent higher at 93.31 pence.
"I don't think the risk around Glencore is getting much worse," Chris LaFemina, a mining analyst at Jefferies with a hold rating on the company, said by phone. "Commodity prices are going against them and that's the problem. They are fighting an uphill battle."
At current prices, the company would generate $US7.3 billion of earnings before interest, taxes, depreciation and amortisation next year, according to LaFemina. Another 10 per cent drop in commodities would slice about $US1 billion off that figure, he said.
A spokeswoman for Glencore declined to comment when contacted on Tuesday.
"Glencore has basically enacted on the plan it's laid out and is working through that plan, and credit to them for doing it," Clive Burstow, who helps manage $US35.6 billion at Baring Asset Management in London, said by phone on November 11. "In general though, they have been hit by a broader concern, which is the sector seeing a selloff."
Commodity slump
Copper is down 9.8 per cent since Glencore announced its $10 billion debt-reduction program on September 7 and was at a six-year low as of Tuesday. Zinc has fallen 15 per cent and thermal coal, of which Glencore is the No. 1 exporter, has sunk 7.6 per cent. That hurts its income, but also the value of mines and stockpiles it uses to calculate net borrowings.
The company's €400 million ($600 million) of 3.7 per cent bonds maturing in October 2023 dropped US2.3¢ on the euro this month to an almost seven-week low of US82.1¢, according to data compiled by Bloomberg. The yield has risen to 6.7 per cent, the data show.
Glasenberg, 58, a South African renowned for his fierce intelligence in deal-making, has worked for the Swiss firm for more than three decades. He steered Glencore through a China-led commodity boom, a $US10 billion London listing in 2011 and a $US29 billion takeover of coal exporter Xstrata two years later, when prices neared their peak. As recently as last year he was plotting an audacious takeover of larger competitor Rio Tinto Group.
Only with recent turmoil have there been any murmurings on how he runs the business. Still, with an 8.4 per cent holding, a history of increasing value in the commodity business and experience in weathering past storms, Glasenberg's position appears secure.
Untouchable Ivan
"Any kind of decline in metals prices like this puts the leveraged players under extreme pressure," Paul Gait, a Sanford C. Bernstein mining analyst in London, said by phone. "What this does is it clearly puts pressure on Ivan and the management of Glencore to really accelerate that debt reduction target."
As part of the debt plan and associated share sale in September, the billionaire and senior managers invested more than $US500 million back into the company - the CEO's personal commitment was about $US210 million to maintain his shareholding. That's as the value of the former Olympic standard race-walker's stake in the company has slumped to near $US2 billion currently, from close to $US9 billion at the time of Glencore's initial public offering.
This year, the company is the worst performer on the UK's key FTSE 100 Index of stocks.
"I suspect that he is under pressure," said Rob Clifford, an analyst at Deutsche Bank. "They've lost their mojo somewhat. But over the decades he's got more right than he's got wrong so that will carry him through. If you want to be an investor in Glencore, you've got to think like Ivan. You've got to be prepared to be in there for some years. You tip money in the down years and you take it out in the up years."
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