South African investors get Glencore Xstrata boost
IT IT PAYS PAYS TO TO KNOW KNOW IVAN IVAN GLASENBERG; GLASENBERG; IT PAYS EVEN IF YOU DON’T KNOW HIM. JUST ASK THE 3 600 FELLOW I NHABITANTS OF RüSCHLIKON, A VILLAGE NEAR LAKE ZURICH WHERE GLASENBERG LIVES. WHEN THE FORMER JOHANNESBURGER LISTED GLENCORE GLENCORE ON THE LONDON STOCK EXCHANGE, HE PAID SO MUCH PERSONAL TAX THAT THE VILLAGE ALLOWED ITS MEMBERS A 7% TAX CUT.
Ayear earlier, Switzerland granted Glasenberg citizenship and a passport that he pockets along with those to SA, Israel and Australia – national allegiances that are really more commercial footprints. Glasenberg is a citizen of a globally traded commodities empire, now called Glencore Xstrata, of which he is CEO. Zinc in Kazakhstan to nickel in Quebec, it’s all part of a game of risk Glasenberg expertly manages.
Once described as the biggest company you’d never heard of, GlencoreXstrata is now very public. After nine years spent growing Glencore from its headquarters in the canton of Zug, Glasenberg listed it in 2012 and a year later merged it with Xstrata. At $38bn, it was one of the largest deals of the year.
So it’s not surprising the proposed secondary listing of GlencoreXstrata on the Johannesburg Stock Exchange, expected by the fourth quarter of this year according to a company statement on 10 September, has been met with excitement in SA – and not only because it provides the country’s beleaguered mining investors with a break from the tedium of negative newsflow.
“It does mean a lot,” says Zeona Jacobs, director for issuer and investor relations at the JSE.
Anglo American generates 5.5% of trade by value on the bourse so there’s some expectation that GlencoreXstrata, which at a market capitalisation of R667bn is double the size of Anglo American, will have a significant impact. “A company of this size and magnitude means a lot in terms of trading. We’re very excited,” says Jacobs.
So what will investors be getting when GlencoreXstrata takes its place on the JSE? In a word: variety.
“SA fund managers are relatively limited in what they can buy,” says Michael Kavanagh, an analyst for Noah Capital. “You normally end up playing Anglo against BHP Billiton at different times, but GlencoreXstrata is a completely different animal to either of those companies,” he says.
It is certainly more diversified. In the estimation of David Pleming, investment manager at the privately-owned Tantalum Capital, Glasenberg’s company differs from the other major mining groups in several ways. One such differentiator is its strong marketing bent, another is having no exposure to iron ore, a commodity whose price is expected to decline significantly in the years ahead and which is a significant earnings contributor for all the other LSE major miners.
Based on the first half of the current financial year, 89% of Rio Tinto’s pretax earnings were derived from iron ore; BHP Billiton had 52% exposure to iron ore, while Anglo American derived 48% of pre-tax earnings from the steel ingredient.
In contrast, GlencoreXstrata has smaller exposure to more commodities such as oil sector, coal (14% of pretax earnings), nickel (3%), and zinc (13%). Its biggest exposure by commodity is to copper, which comprised 30% of pretax earnings. The crucial difference about GlencoreXstrata, however, is that it trades all of the above.
Speaking at an investor day recently, Glasenberg said that his company wouldn’t invest in minerals that it couldn’t push through its infamously aggressive marketing division, a collection of traders described somewhat apocryphally one suspects as cut-throat.
GlencoreXstrata sells minerals, but it also deals in the agricultural sector, trading grain, wheat, soya and cotton. Marketing agricultural products may have provided only 1% of pretax earnings, but metals and energy trading comprised 38% of pretax earnings – the single largest contributor.
The trading division requires a lot of working capital – as marketers will not hesitate to stockpile minerals at the mine when prices are poor, hence the often jabbing accusation that GlencoreXstrata ‘controls’ the markets.