Glencore still has a long way to go

GLENCORE’S lowest profit in its five-year history as a public company shows that for all its success in soothing investor concerns about a debt-heavy balance sheet, it still has a long road to recovery.

Weak raw-material prices caused profit at the commodities giant to plunge 66 percent in the first half to $300 million (R4.21 billion). The shares dropped 3.1 percent in London even as Glencore promised to cut debt even further and said it might resume paying dividends next year. The company, the world’s biggest coal exporter, also recorded a $395m loss after hedging future coal production prior to a price rally.

The results from Glencore reflect the dire state of the mining industry – BHP Billiton also suffered its lowest profit yet and Rio Tinto’s were the poorest in more than a decade. Last year’s collapse in commodities forced Glencore to roll out a rescue strategy that included scrapping its dividend, selling $2.5bn of stock, disposing of assets and slashing spending.

“We are optimistic on Glencore’s commodity exposure, but we still see challenges ahead for the company,” Chris Lafemina, a mining analyst at Jefferies International, said. “Poorly timed coal hedges have ironically limited Glencore’s leverage to the ongoing recovery in coal prices.”

The company widened its debt-reduction target by $500m and plans to trim net borrowings to as low as $16.5bn by end of the year. The commodity slump means Glencore now generates most of its cash from trading as its mines and smelters around the world struggle to make a profit.

Glencore closed at 184 pence (R34.14) in London, valuing the company at $35bn.

The shares have doubled this year as chief executive Ivan Glasenberg checked off targets on the plan to cut borrowings almost in half. It made further progress yesterday by announcing a $670m deal to sell future output from an Australian gold and copper mine.

Divestment mode

“The mining sector is still in divestment mode, it’s still trying to get balance sheets in order,” Colin Hamilton, an analyst with Macquarie Group in London, said on Wednesday. “They are doing much more work to repair their balance sheet, I would say, than many of their peers.”

The board will make a decision whether to resume paying dividends ahead of results in March, chief financial officer Steve Kalmin said. Glencore, based in Baar, Switzerland, paid 6 US cents (R0.84) a share in August last year.

At the trading business, adjusted first-half earnings before interest and tax was $1.22bn. – Bloomberg