Some banks rate Glencore’s prospects now a tad brighter

A SPLIT among analysts about Glencore’s prospects has widened even after the commodity trader and miner took more steps to cut its heavy debt burden, hoping to reverse a dive in its share price.

Critics, such as Goldman Sachs and Investec, are standing by their tough stance on the London-listed firm and have slashed their targets for its share price, mainly because they see the risk of further deterioration in global metals prices.

Supporters such as UBS and Citi, likewise, have stuck to their bright outlooks, reiterating their belief that Glencore will successfully restructure itself, prompting a recovery in the stock. While their views are polarised, the two camps’ unwillingness to budge means the market’s overall assessment of the firm is nearly static.

The average price target of 28 analysts has dipped by only about 3 percent in the past 30 days to 176 pence (R37.24), while their ratings on whether to buy, hold or sell the stock have also barely changed, according to Thomson Reuters data.

A slump in copper, zinc and coal prices has badly hurt Glencore, which has one of the highest debt levels in the industry.

No rapid recovery in commodity prices seems likely as economic growth slows in China, a major consumer, and the US is preparing to raise interest rates, leading to a likely strengthening of the dollar and slower growth in emerging markets, a major source of commodity demand.

Glencore shares, which have shed more than two-thirds of their value this year, suffered their worst day in late September. They plummeted about 30 percent in one move partly attributed to a research note from Anglo-South African investment bank Investec, which said nearly all of Glencore’s equity value might evaporate if commodity prices remained weak.

From late September they came off those record lows, but have failed to stage a convincing recovery, and have fallen back by nearly a quarter again over the past two weeks to 97p.

The shares have declined despite Glencore saying early this month that it was making good progress in cutting its $30 billion (R418bn) debt by a third and announcing a deal to sell future silver output for $900 million in cash in a socalled “streaming” deal.

Glencore had already suspended its dividend, promised to sell assets and raised $2.5bn through a share placement.

Although Investec analyst Marc Elliott was “impressed” with the silver deal, the bank stuck with a “sell” rating and last week further chopped its target price to 77p from 125p in September.

“We haven’t really changed our position on Glencore. What we’re seeing in copper and across the commodity space shows that there are tough times ahead,” he said.

Copper, usually a major profit centre for Glencore, sank to another six-year low on Thursday on worries about demand in top consumer China, deepening its losses this year to 26 percent.

“If US rates are going to rise and emerging markets are struggling, so commodity demand is weaker than we would all hope, and debt costs are going to go up, it doesn’t bode well for leveraged miners with thinner margins,” Elliott said.

Goldman has also cut its target price since September, by nearly a quarter to 100p.

“Despite the equity raise and the streaming deal the persistently lower commodity prices have seen higher cash burn at the assets,” the bank said.

“The rapid debt reduction plans should remove the balance sheet and trading fears that have overly impacted the share price,” analyst Rob Clifford said. – Reuters