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’

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