Warning of little value in Glencore if low commodity prices persist

GLENCORE tumbled the most to a record low as Investec warned that there was little value for shareholders should low commodity prices persist.

Shares of the miner and commodity trader run by billionaire Ivan Glasenberg dropped as much as 17 percent to 80.26 pence (R16.90) in London, the lowest since the company’s $10 billion (R138.88bn) initial public offering in 2011. The stock has plunged 72 percent this year, making it the worst performer in the UK’s benchmark FTSE 100 index.

The company has been forced to sell new stock and scrap its dividend as part of a $10bn debtreduction programme as China’s economic slowdown hurt demand for commodities and sent prices slumping.

Goldman Sachs said last week that the Glencore’s recent steps to reduce debt and bolster its balance sheet were inadequate.

“The challenging environment for mining companies leads us to the question of how much value will be left for equity holders if commodity prices do not improve,” Investec said in a note to investors yesterday. Glencore was down 15 percent at 82.28p by 10.04am in London yesterday. The shares slumped more than 16 percent for the second time in a week and have declined in seven of the last eight days.

The company had hired Citigroup and Credit Suisse to sell a minority stake in its agricultural business, a person familiar with the situation said on Friday.

The sale is part of the debtcutting programme announced earlier this month that included selling $2.5bn of new stock in an attempt to reduce the company’s debt from $30bn to $20bn.

“In the current climate, debt is fast becoming the most important consideration for mining company management,” Investec said. “Under a spot scenario, we feel that Glencore may have to undertake further restructuring beyond the dividend suspension, capital raising and asset sales programmes it has already announced.” Glencore’s stock has been battered as investors retreat from commodities as China’s economy expands at the slowest pace since 1990. The Bloomberg commodity index last month reached the lowest in 16 years.

Goldman Sachs said that should commodity prices fall another 5 percent, the metrics needed to maintain the company’s credit rating would be out of the required range.

China’s industrial profits dropped 8.8 percent last month, the most in at least four years, signalling weakening demand in the second-biggest consumer.

The world’s biggest consumer of commodities is struggling with excess capacity, sluggish investment and weaker manufacturing. – Bloomberg