IN­VEST­MENT COUP

South African in­vestors get Glen­core Xs­trata boost

Finweek English Edition - - FRONT PAGE - BY DAVID MCKAY

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.

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