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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (113260)	9/8/2015 4:01:42 AM
From: elmatador	Respond to of 218453

Chief executive Ivan Glasenberg seeks to protect group’s investment grade credit rating Glencore, albeit unwillingly, is adopting the brace position aboard the stalling aircraft of world commodities markets. The mining and trading group plans to slash debts by $10.2bn — about one-third — by the end of 2016. Investors sent chief executive Ivan Glasenberg and chief financial officer Steven Kalmin back to their spreadsheets to rework a proposal for a far more modest debt reduction revealed at the time of disappointing half-year results last month. The surprise shift in strategy underlines the humbling extent to which Mr Glasenberg and his lieutenants have been wrongfooted by market sentiment. As the company rode the China-fuelled commodities boom of the previous decade, Glencore was hailed by some as an economic power rivalling nation states. Its executives were turned into paper billionaires by the company’s flotation in 2011, and Glencore’s determination to shake up mining in the way it had commodities trading was confirmed by its hard fought takeover of Xstrata in 2013. But the Chinese economic slowdown and slump in commodities prices have shattered the Switzerland-based company’s aura of invincibility. Glencore’s shares have been the worst performers in the FTSE 100 index over the past year, as investors grew increasingly concerned about the company’s high debts compared to competitors. Glencore had aimed to trim net debt from $29.6bn to $27bn in the near term. This would have kept its ratio of borrowings to underlying earnings at below three times, assuming the latter were around $9bn. By cutting net debt much harder, to just over $20bn by the end of next year, Glencore could see profits drop to $7bn and still stay below its leverage ceiling. That implies commodity prices could fall another 20 per cent or so. “There has been a move among investors to say: ‘Let’s make this business bullet proof’,” says Mr Kalmin, as executives put a brave face on having to devise a more aggressive debt reduction plan. “If you can’t weather a storm, it doesn’t matter if things are expected to pick up in the medium term.” More video Glencore shareholders will suffer a considerable blow of their own from the balance sheet restructuring. The 2015 final dividend and 2016 interim payout have been suspended to save $2.4bn. The group will also make a dilutive $2.5bn equity issue. A 7 per cent jump in Glencore’s shares on Monday showed equity investors have offset these negatives against the positive that the group will be better armoured to withstand adversity. Glencore’s surprise announcement left some bears hurrying to cover short positions. The proportion of available shares sold ahead in anticipation of price falls had doubled in recent weeks to about 3 per cent, according to data from Markit. The aim of Glencore’s debt strategy is to defend its investment grade credit rating. This is assessed at BBB by the agency Standard & Poor’s, which last week moved Glencore from a “stable” to a “negative” outlook. A cut in the rating would reduce the bulk of Glencore’s debt to one notch above junk. Glencore has a weaker rating than Rio Tinto and BHP Billiton. Investors watch its debt costs for another reason too: the company is obliged to tie a lot of capital up in the stock held by its trading arm. Pure play miners do not have this problem. For Glencore’s sums to work, it needs to be correct in its claim that the company can easily sell stock — tonnes of copper, coal and the like — worth $17bn, and that this figure can thus be deducted from debts. S&P is sceptical how easily such commodities could be liquidated in a market rout and applies a 10 to 25 per cent discount. So is this Mr Glasenberg’s Waterloo? The hard-nosed trader has not only been forced to rework initial plans for debt cuts, but has also been required to suspend production at two African copper mines. Analysts at RBC Capital Markets estimate surplus production from the Katanga and Mopani mines at 167,000 tonnes in 2015 and 2016. The removal of this overhang “should be accretive to copper market fundamentals”, say the analysts, and will thus presumably be good for the likes of Rio and BHP. Furthermore, Glencore is seeking strategic investors for one of its own businesses, agricultural commodities. The accusation sometimes levelled against Glencore in the City of London is that a group of slick traders cashed out their investments at the top of the market. But Mr Glasenberg and executives such as Telis Mistakidis, head of copper, have mostly maintained or increased stakes in Glencore that have declined in value. A balanced view would be that Mr Glasenberg has shown a greater willingness to listen to independent shareholders than some other proprietor capitalists. Glencore has been a disappointing investment, with shares dropping almost three-quarters since flotation. But the former partnership has been a more transparent and better-managed public company than pessimists expected, albeit in the face of criticism from non-governmental organisations over some African acquisitions. Mr Glasenberg, an accountant turned on to trading by a meeting with that most archaic of beasts, a tallow trader, will probably consider two questions as he prepares to increase his shareholding. First, was he right to abandon low-profile private status when he did, to pursue Xstrata? And second, if the float was badly timed, have investors done any better now in requiring him to anticipate a further steep fall in commodity prices?