A view on Glen­core by Cadiz’s Peter Ma­jor

Glen­core has started to whit­tle away its huge $30bn debt, draw­ing a line un­der its crum­bling share price. But how do an­a­lysts rate its chances of com­ing right? And why ex­actly has it taken such strain? Gi­uli­etta Talevi spoke to Cadiz Cor­po­rate So­lu­tions’

Financial Mail - Investors Monthly - - Front Page - PAGE 10

Q They ’ve just bagged $2,5bn from a share book­build — which seemed to be well re­ceived. Was this a bet­ter move than go­ing through a rights of­fer?

A I think they over­re­acted, but I was happy to see it. [Glen­core CEO Ivan Glasen­berg] was a lit­tle too bullish on com­modi­ties but he had to keep say­ing that oth­er­wise peo­ple would have dumped his share. He was too op­ti­mistic. Though the com­pany could live with it, the banks couldn’t.

This lets him off the hook be­cause he can now say he’s do­ing this for the bankers, even though he might be do­ing it for him­self. If com­modi­ties shoot up he can say: “See, I told you so, I went along with the bankers.”

QWhy

has Glen­core been so beaten up? Their trad­ing arm, af­ter all, was sup­posed to give them some sort of a hedge?

A Yeah, (but) you need a bal­ance sheet. When you talk to these guys over lunch they tell you about all these great trades they do; it’s like talk­ing to a diamond pro­ducer who’ll say, oh, we found a 300 carat stone. I don’t want to hear about great trades: I want to see at the end of the year that they av­er­aged a 3,5% mar­gin, not 1%. Trad­ing isn’t as lu­cra­tive, the mar­gins aren’t as big as we had hoped, and they’re not great as­sets.

QWhen

peo­ple talk about Glasen­berg be­ing re­ally as­tute, has the mar­ket given him too much cre­dence?

A He’s as­tute, but is he ex­pe­ri­enced? If I make Bill Gates head of Western Deep lev­els, if I make Elon Musk head

of South Deep, maybe other guys would buy it, but I’m not sure I would be­cause it’s a dif­fer­ent en­vi­ron­ment. Trad­ing is dif­fer­ent to run­ning the as­sets. When trad­ing you’re pro­tected, it’s like be­ing a stock­bro­ker: you al­ready have a buyer lined up be­fore you have a seller. You’ve al­most al­ways got the deal done on both sides. Min­ing is dif­fer­ent and (Glen­core) is diver­si­fied. His as­sets are scat­tered all over, and most of them he took over from Xs­trata. Xs­trata’s near bust be­cause it’s as­sets were too new, too diver­si­fied. Mick Davis might have been a deal­maker but there’s a dif­fer­ence be­tween a deal­maker and a miner. Are they world-class as­sets? I don’t think so. They’re only world-class as­sets when you can make money in the lower decile. All these guys have had 10 years of fan­tas­tic com­mod­ity prices, no­body re­mem­bers how to mine. Bil­li­ton and Rio at least have in­sti­tu­tional mem­ory. But where’s the in­sti­tu­tional mem­ory at Glen­core and Xs­trata? Glasen­berg’s as­tute, but who could put all these as­sets to­gether and make them hum?

I’m not sure any­body could.

Q What do you think are Glen­core’s weak­est as­sets?

A I’m wor­ried about these Con­golese and Zam­bian as­sets … For­eign­ers I talked to said: “Peter, if you’re a ge­ol­o­gist, this is nir­vana.”

The ge­ol­o­gists still love it, but all a ge­ol­o­gist does is drill a hole and take an as­say. The min­ing com­pa­nies have to get that stuff out of the ground; they have to put bil­lions of dol­lars in the ground and then they have to get more bil­lions out and show a profit. It’s hard to say those aren’t great as­sets: they all look good on their grades, but it looks like ev­ery­body’s mar­ginal in Zam­bia. These aren’t bad cop­per prices: and all these com­pa­nies in Congo and Zam­bia seem to be bleed­ing.

Q When you say these aren’t bad cop­per prices, should these min­ers be mak­ing money from them?

A Yes. The long-term price of cop­per is about $2,30 (a pound), say $5 200/t. It’s trad­ing at $2,45. If you can’t make money at the mean, you shouldn’t be in busi­ness.

When prices are at the mean, you’re sup­posed to have a 30%, 35% gross mar­gin. Now, if these guys are only break­ing even at the mean, they’re in­ef­fi­cient.

Al­most ev­ery­body’s un­pro­duc­tive be­cause they’ve had 10 years of huge prices and easy money. That’s not how min­ing is! For hun­dreds of years, min­ing was a long-term, tough busi­ness and you had to be the low­est-cost pro­ducer. No­body knows about pro­duc­tiv­ity or ef­fi­ciency. All they know is to sit back, or­der more units, buy things at the top of the cy­cle and in­crease tons. It’ll take at least 2-3 years to re­learn how to mine. Those with av­er­age as­sets, with­out ex­pe­ri­ence, are go­ing to take the most pain.

Q Do you think it was a mis­take for them to go public, and cob­ble to­gether the Glen­core that it is to­day?

A No, not at all but I am bowled over by guys who think they can be Harry Op­pen­heimer. It takes two gen­er­a­tions to make a min­ing house. Ernest worked like a mad­man build­ing An­glo. I think Harry was raised right: he in­her­ited a good board, he in­her­ited good min­ing guys. He had so many engi­neers: me­chan­i­cal, elec­tri­cal, min­ing, ge­o­log­i­cal. He had a strong team that his dad had ham­mered into shape over decades. In this new mil­len­nium, we want to make min­ing ty­coons. Davis wanted to start a com­pany … well, any­one can start a com­pany but can it be self-suf­fi­cient? He was just liv­ing off the mar­ket. It’s just cob­bling deals to­gether. That’s not build­ing a sus­tain­able min­ing com­pany.

I’m not bad-mouthing any­one be­cause I think Glasen­berg says the right stuff. He’s right, these guys were ex­pand­ing all over the place; they’re cut­ting their own throats. Guys buy­ing as­sets that should’ve been closed; run­ning loss-mak­ing as­sets longer than they should.

Min­ing com­pa­nies have them­selves to blame — tak­ing on debt, pay­ing over the top for as­sets. I don’t be­lieve any­body can build a com­pany on debt. I have seen debt stran­gle and choke com­pa­nies.

Q The debt is what has ev­ery­one wor­ried about Glen­core. But do you think what they’ve done — the cap­i­tal rais­ing, scrap­ping the div­i­dends, clos­ing mines — will this pull them right? A Yeah, it’s dra­matic. It’s ral­ly­ing the troops, it’s giv­ing the mar­ket the right sig­nals. And he’s tap­ping all pos­si­ble sources.

It’s well thought out and he does have quite a bit to work with. Will it work? I think it will, but com­mod­ity prices are go­ing to de­ter­mine how well and how soon. If com­mod­ity prices stay where they are all these guys can catch their breath and im­prove. If com­mod­ity prices start fall­ing be­low the mean, it can be panic sta­tions. They may close things that may hurt them later on. The best time to close things is when com­mod­ity prices are high and they start down.

You don’t want to close things when com­mod­ity prices are at their mean and be­low be­cause they might ac­tu­ally be eco­nom­i­cal with a lit­tle more work.

It just shows: debt can get any­body into trou­ble. No­body could have be­lieved this cy­cle wouldn’t re­vert to the mean. Com­modi­ties al­ways do!

These things weren’t a lit­tle above the mean, they were in­sanely above it.

We were un­pre­pared for this cy­cle. They were drunk on sip­ping the su­per­cy­cle Kool-aid. When com­mod­ity prices ran in the 70s guys were more scared than happy; they were ex­cited but they knew some­thing was weird, it didn’t make sense. This time they acted like they de­served it, like it was nor­mal. But it was ab­nor­mal. Gov­ern­ments started build­ing poli­cies around it, started talk­ing su­per-taxes. It shows: ev­ery­body was in­tox­i­cated by the QE and this com­mod­ity run.

Pic­ture: iS­TOCK

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