Upgrade to Neutral
We upgrade GLEN to Neutral on the company’s announced debt reduction plan. Unlike
other management teams in the sector, GLEN’s has acknowledged its debt problem and
is taking steps to address it. Total initiatives would generate $10 bn in cash similar to
the figure outline in our recent note: “Framing value and the $50 bn question, part II”.
We set a PO of GBp160, about 1x our DCF derived SOTP. We think the plan goes some
way to addressing some of our concerns on GLEN’s financing, we do still have a
question mark on Chinese demand and hence (only) upgrade to Neutral. Even after the
reductions, the company will still be quite highly geared (new target net debt low 20
billions). On spot EBITDA, this is around 3x geared.
Key elements of the plan
$2.5bn equity raise: 78% underwritten by investment banks, 22% covered by
commitments from Glencore senior management including CEO and CFO. Cutting
dividend saving $3.9bn approximately : final 2015 div: $1.6bn, interim 2016: $800mn,
final 2016: $1.5bn. $2bn to be raised from asset sales (precious metals streaming,
minority participation of 3rd party strategic investors in certain agricultural assets).
$1.5bn working capital reduction. $500mn - $1bn cut in industrial assets capex to end
FY16. $500mn-$800mn reduction in long-term advances made by Glencore. The overall
anticipated capital expenditure on industrial assets in 2015 and 2016 is now US$10
billion to US$10.5 billion.
Copper cuts: Putting money where mouth is
Glencore has also announced plans to cut production at certain African copper assets
which remove up to 400 kt from the market over the next 18 months. We think this
should tighten the copper market and help put a floor under prices. Glencore’s CEO, Ivan
Glasenberg, is putting his money where his mouth is, having often chastised fellow
CEOs for oversupplying commodity markets. Wow!