Ivan Glasen­berg's come­back plan

Glen­core’s fair­ground ride of the past month has left in­vestors dizzy. And while com­fort­ing noises from the US Fed­eral Re­serve have pro­vided some re­as­sur­ance, the jury is out on whether com­mod­ity prices are in sus­tained re­cov­ery mode. Stephen Gun­nion take

Financial Mail - Investors Monthly - - Front Page -

You know in­vestors are on edge when a sin­gle bro­ker’s note can wipe more than R80bn off the value of a sin­gle com­pany within a day.

But so it was, when Hunter Hill­coat and his col­leagues, sell-side an­a­lysts at In­vestec in Lon­don, gained their 15 min­utes of fame with their now fa­mous re­port on Glen­core, pub­lished in Septem­ber.

The con­clu­sions were pretty alarm­ing, im­ply­ing that Glen­core, the dual-listed com­modi­ties trader that floated for £37bn in 2011 and then au­da­ciously bought out Xs­trata, could be worth noth­ing if the sta­tus quo doesn’t im­prove and com­mod­ity prices drop fur­ther.

It sparked pan­de­mo­nium. Glen­core’s shares lost close to a third of their value in in­tra­day trade on Septem­ber 28, be­fore clos­ing 26% lower in Jo­han­nes­burg.

It was a se­vere blow to the South African founder, Ivan Glasen­berg, who has not only seen the value of his 8,4% stake tum­ble be­low R3bn, but also had to go cap-in-hand to the mar­ket with a range of cost-cut­ting mea­sures to ap­pease anx­ious share­hold­ers.

Th­ese in­cluded slash­ing div­i­dends, rais­ing US$2, 5bn in eq­uity and com­mit­ting to $2bn of as­set sales — all to con­vince share­hold­ers it has a cush­ion to meet fu­ture obli­ga­tions.

It seems to have worked, be­cause Glen­core’s stock has re­gained some com­po­sure. But the out­look for it and other com­modi­ties com­pa­nies re­mains any­thing but cer­tain.

In that note, In­vestec says it is still pric­ing in sub­dued com­mod­ity mar­kets for sev­eral years to come — de­spite a re­bound in prices af­ter Glen­core said it would cut pro­duc­tion of coal, cop­per and zinc, and the US mone­tary author­i­ties showed a re­luc­tance to hike rates.

In­vestec’s rea­son­ing is that the “co­in­ci­dence” of ex­cess sup­ply and a slow­down in de­mand, par­tic­u­larly from China, means it’ll take un­til 2018 for bal­ance to re­turn once high-cost pro­duc­tion ex­its the mar­ket.

It must be said, how­ever, that oth­ers are less gloomy.

Over­all, 17 an­a­lysts rate Glen­core as a “buy” both in Lon­don and on the JSE, while there are 11 holds in SA and only three “sell” rec­om­men­da­tions.

As a whole, the an­a­lysts ex­pect its share price to gain nearly 50% from its cur­rent lows of around R24,50 to reach nearly R37 within the space of a year.

Graeme Körner, di­rec­tor of the Körner Per­spec­tive, says there’s in­creas­ing op­ti­mism that com­mod­ity prices are form­ing a base, driven by the cuts in pro­duc­tion across the board.

“It is frankly im­pos­si­ble to pre­dict the near-term price move­ments for com­modi­ties, es­pe­cially as some com­modi­ties, for ex­am­ple cop­per, ap­pear in part at least to be serv­ing as a proxy for China. We sense though that oil, as an ex­am­ple, is re­flect­ing greater bal­ance in sup­ply and de­mand, and we see this hap­pen­ing in other com­modi­ties as well,” he says.

“We also think com­mod­ity shares have ex­pe­ri­enced a bit of a re­lief rally, in part be­cause they were dis­count­ing a bleak medium term out­look a few weeks back.”

Glen­core’s re­bound has been as sharp as its fall. On Septem­ber 28, it hit R15,41/share on the JSE, but has since gained nearly 60% to R24,60.

But this was only af­ter Glasen­berg re­as­sured in­vestors of the strength of its credit lines, re­veal­ing he has back­ing from more than 70 of its cred­i­tors.

Farai Mapfinya, head of eq­ui­ties at JM Busha As­set Man­agers, says th­ese credit lines are crit­i­cal for Glen­core’s trad­ing busi­ness. With­out fi­nanc­ing, in other words, there is no Glen­core.

But it seems the re­cov­ery in Glen­core’s stock re­flects the com­fort that in­vestors felt with the speed at which Glasen­berg iden­ti­fied as­sets to sell to help re­duce Glen­core’s debt — such as its agri­cul­tural busi­ness.

“One of the key con­cerns was the level of debt and they have com­forted the mar­ket that they will be tak­ing care of that debt,” Mapfinya says.

Körner, who ad­mits to not fol­low­ing Glen­core as closely as some other com­mod­ity

com­pa­nies, is not con­vinced of Glen­core’s in­vest­ment case.

“A lot of peo­ple said the com­bi­na­tion of a com­modi­ties trad­ing busi­ness to­gether with hav­ing their own mines was a re­ally com­pelling ar­gu­ment. But as a col­league said the other day, they are now nat­u­rally long, al­ways long [on] com­modi­ties,” says Körner. “Frankly, other than spec­u­lat­ing that Glen­core only listed in SA as a pre­cur­sor to mak­ing a play for An­glo Amer­i­can, I have never un­der­stood why they came and listed here.”

But In­vestec’s re­port ques­tions whether in­vestors can still find value in min­ing com­pa­nies — par­tic­u­larly those that are highly geared. Min­ing com­pa­nies “gorged them­selves on cheap debt in a race to grow pro­duc­tion” as China stim­u­lated its econ­omy af­ter the global financial cri­sis, In­vestec ar­gues.

“In the cur­rent cli­mate, debt is fast be­com­ing the most im­por­tant con­sid­er­a­tion for min­ing com­pany man­age­ment,” it says. “Never un­der­es­ti­mate the abil­ity of debt to un­der­mine the value of eq­uity. ” That neatly sums up the prob­lem that eq­uity hold­ers face when highly lever­aged com­pa­nies see their much-di­min­ished earn­ings ab­sorbed by the obli­ga­tions of debt hold­ers.

De­spite its emer­gency mea­sures, Glen­core’s to­tal debt — in­clud­ing cash and the value of com­modi­ties it holds for trad­ing pur­poses — is now more than

$50bn, a chunky fig­ure in any­one’s book.

In­vestec says this leaves Glen­core weaker than the likes of BHP Bil­li­ton and Rio Tinto when com­mod­ity prices are low and with lower-mar­gin as­sets than some of its min­ing peers.

In­vestec expects Glen­core’s debt as a pro­por­tion of its to­tal value to fall from 81% this year to 20% by the end of the decade, which is still twice that of BHP and Rio.

Still, Glen­core has been quick to in­sti­tute some of the tough de­ci­sions it promised back in Au­gust as part of its plan to cut net debt by a third to around $20bn by 2016.

Glasen­berg and his top brass par­tic­i­pated in the rights is­sue to pre­vent their stakes be­ing di­luted fur­ther. They’ll be feel­ing mighty hard done by al­ready.

At one stage, Glen­core was dubbed the “mil­lion­aires fac­tory” in hon­our of the fact that it minted so many new mil­lion­aires when it listed in 2011. In par­tic­u­lar, Glasen­berg and his four main part­ners be­came overnight bil­lion­aires when the com­pany floated in 2011 — the largest IPO in the UK.

But th­ese newly wealthy Glen­core ex­ec­u­tives have seen the value of their in­vest­ment plunge dra­mat­i­cally since the share price plunge.

To add power to com­mod­ity prices (and the share price), Glen­core has taken sup­ply out of the mar­ket and has moth­balled two cop­per mines — in Zam­bia and the Demo­cratic Re­pub­lic of Congo — un­til prices re­cover.

It is also look­ing at sell­ing cop­per mines in Chile and Aus­tralia, which an­a­lysts say could fetch be­tween $600m and $1bn.

Though its de­ci­sion to cur­tail zinc pro­duc­tion amounted to just 4% of global sup­ply, zinc ral­lied as much as 12% on the news and ended 6% higher on Oc­to­ber 9. An­a­lysts said it wasn’t so much the amount, but rather what the com­pany was pre­pared to do to shore up prices.

Glen­core says cur­rent prices don’t “cor­rectly value the scarcity” of its zinc resources. Still, tak­ing some out of pro­duc­tion will pre­serve the value of re­serves in the ground, it says.

It’s a bold tac­tic which may just work: an­a­lysts say it could lead to a deficit in the mar­ket, so what Glen­core loses in vol­ume, it may re­cover in price.

There’s a hu­man cost to all this, though.

While Glen­core’s ac­tions may ul­ti­mately ben­e­fit in­vestors (who have seen the value of their hold­ings in the com­pany slump more than 50% this year), they have con­trib­uted to the loss of jobs on mines in coun­tries in­clud­ing SA, Zam­bia, Peru and Aus­tralia. Thou­sands of jobs have been axed. But the im­pact of Glen­core’s ac­tions has been felt more widely too: Zam­bia’s kwacha, for ex­am­ple, has slumped as the com­pany scaled back op­er­a­tions in that coun­try.

And for Glasen­berg’s man­age­ment team, once hailed as vi­sion­ary for com­bin­ing min­ing as­sets with a trad­ing busi­ness, buy­ing mines at the top of the mar­ket and sell­ing at the bot­tom seems less so.

❛❛ To add power to com­mod­ity prices, Glen­core has moth­balled two cop­per mines un­til prices re­cover

Pic­ture: JAMES OATWAY

Ivan Glasen­berg … value of stake took a blow.

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