Glencore goes into freefall
MORE than £ 3.5bn was wiped off the value of Glencore after warnings that its shares could become almost worthless if commodity prices continue to languish at their current levels.
Shares, which have already hit record lows this month, plunged by a further 30pc yesterday.
Investors were spooked by grim economic data from China and stalling growth in emerging markets. This was compounded by a stark warning from Investec that highlighted the sheer size of Glencore’s debt mountain in the face of rock-bottom metal prices.
The rout in Glencore and others in its sector wiped £36bn off the value of the FTSE 100, which dropped below the psychologically important 6000 barrier. The index closed down 150 points at 5958.8.
The price of copper fell to near six-year lows, while crude oil slid by more than 2pc. The mining sector fell on waning demand from China, the largest global consumer of raw materials, after data showed industrial profits fell at the sharpest rate in four years in August.
Investec suggested the Swiss group’s entire market value could be wiped out if prices remain at current low levels.
Analyst Hunter Hillcoat said Glencore investors would see their value ‘virtually eliminated’ if commodity prices fail to recover.
He said the same was the case for mining group Anglo American, down more than 10pc or 62p to 552.7p, but that Glencore was particularly at risk because of its ‘higher debt base’.
He said shareholders in Glencore would have a rapidly shrinking slice of ‘equity pie’ if commodity prices fail to recover.
Glencore shares closed down 29.4pc or 28.6p at 68.62p, making it the worst performing stock in the FTSE 100 this year with a fall of more than 77pc.
The group, led by chief executive Ivan Glasenberg, tried to cut its debt with a share placing at 125p this month, only to see its market value fall sharply since then.
Glasenberg is one of the biggest shareholders, with an 8.4pc stake. Along with other investors, he has lost heavily since the group floated in 2011 at 530p a share.
He is trying to sell assets including a nickel business in Brazil to Horizonte Minerals in a bid to shore up the balance sheet.
Industry experts suggest it may have to sell some of its prize businesses such as South American copper mines to stop the rot. ‘But that is giving up an awful lot,’ Investec’s Marc Elliott said.
Other options for the group include striking royalty deals over some of its South American assets.
‘We feel that Glencore may have to undertake further restructuring beyond the dividend suspension, capital raising and asset sales programmes it has already announced or implemented,’ Investec said.
Glencore’s acquisition of Xstrata in 2013 left it loaded with borrowings. It has £7.9bn of debt due to be refinanced before 2017. Investec said debt could come to ‘represent close to half the overall combined enterprise value of the group’.
The International Monetary Fund is expected to cut annual global growth forecasts in October from 3.3pc due to the slowdown in emerging markets, which have been big consumers of commodities in their rush to industrialise.
As demand has fallen, commodity prices have hit their lowest levels since the financial crisis and analysts fear that prices could fall further. ‘We expect prices for most commodities to trough in 2016,’ said Investec.
Others in the sector also fell sharply, with BHP Billiton shedding 61.9p to 964.1p and Chilean copper producer Antofagasta off 25p at 481p. The FTSE 350 mining index sank to its lowest level since 2008.