Glencore’s fortunes turn from disposal of assets to dividends
WHAT a difference a year makes. Glencore fended off questions in 2015 about its survival as commodity prices hit new lows, and now there’s talk that the company’s turnaround plan has gone so well that it could be months away from paying dividends again.
Surging coal and zinc prices, a rebounding stock price and shrinking debt pile made Glencore one of mining’s biggest success stories this year.
Chief executive Ivan Glasenberg, who will provide an update on corporate strategy tomorrow, spent the past year ticking off items outlined in a crisis-induced debt reduction plan, including a goal to sell $4 billion (about R56bn) to $5bn in assets. The market rewarded him for it, with the stock tripling in 2016 and clawing back almost all of last year’s losses.
Now, backed by a strong rebound in profits from its coal and zinc divisions, Glasenberg is in a position to pay back shareholders for supporting him through Glencore’s darkest days as a publicly traded company. None more so than Harris Associates’ David Herro, who placed the biggest wager on a Glencore recovery. The firm invested more than $2bn at a time when others like Lansdowne Partners, one of Europe’s largest hedge funds, were betting big on declines.
“Job one is to continue to make sure that the balance sheet is strong and could withstand any kind of aggressive falls in commodity prices,” Herro, a portfolio manager at Chicago-based Harris, which is Glencore’s fourth-biggest shareholder with about a 5 percent stake, said this month.
“Then, selectively look at opportunities on how to use that free cash,” he added. “If there’s something that could be bought at a discount, at a good price, by all means look at it. But if not, there’s dividends, there’s share buy-backs, there’s all kinds of other things.”
Glasenberg and chief financial officer Steve Kalmin may outline 2017 forecasts for Backed by a strong rebound in profits… Glasenberg is in a position to pay back shareholders. spending, costs and production at Glencore’s investor day tomorrow, according to Credit Suisse. The company may also reveal a new dividend policy after skipping the last two payments to pay down debt, which stood at $30bn last year.
Booming prices for thermal coal and zinc, both up about 80 percent this year, are bolstering profits and provide a path for the return of dividends as early as March, according to UBS.
Trough of the cycle Glencore might resume payments after the first half and start a new policy of returning 40 percent of net profits after tax to shareholders, said Alon Olsha, a mining analyst at Macquarie Group in London.
“Glencore is now able to talk about restarting the dividend ahead of expectations,” said Clive Burstow, who helps manage about $475 million of natural resource assets at Baring Asset Management in London, including Glencore shares. “It’s because suddenly their cash flow generation has been a lot stronger. We’ve arguably moved through the trough of the cycle.”
Glencore hit a 16-month high on November 11 of 292 pence (R5.05) in London, more than double the price from last year’s share sale.
The company has also been buying back bonds, widening a programme to $1.5bn last month. The stock fell 1.1 percent to 281.6p at 9.42am local time, valuing the company at $50bn.
Investors are also looking for guidance on whether Glencore will restore production at mines, especially in zinc, according to Olsha.
Credit Suisse estimates that about 100 000 to 150 000 tons of the 500 000 tons of annual zinc output suspended will be brought back next year.
Another potential use of surplus cash was acquisitions, though it would be premature to expect any big deals, said Burstow of Baring Asset Management.
“I’d like to see another six to nine months of them carrying down the path that they are on,” he said.
“Let’s get the dividend restarted; let’s see that the balance sheet is firmly in a much healthier place.”
Glasenberg built Glencore through a series of acquisitions since taking on the chief executive role in 2002.
He led the strategy of twinning mining assets with the trading business, steering Glencore through a $10bn initial public offering in 2011 and $29bn takeover of Xstrata a year later to add mines and smelters.– Bloomberg