Chastened Glencore on track to hit debt target
Production of ___ copper, which is the base product used to make other copper products, in the Luvata plant in Johor, Malaysia, on Monday, May 13, 2013. Photographer: Munshi Ahmed/Bloomberg©Bloomberg
At Glencore’s interim results on Wednesday, the miner cum commodities trader will try to put a bruising year behind it, presenting a slimmed-down, more modest company than the one that misread the market mood one year ago.
At its half-year results last August, Glencore’s management was defiant in the face of the worst commodities crash in a generation, with Steven Kalmin, chief financial officer, boasting the company could “walk and chew gum”, in spite of investor concerns that its dividend and large debt load were incompatible.
As commodities prices spiralled lower, the brutality of the market’s verdict was matched only by its swiftness, with Glencore’s share price falling more than 50 per cent over the following month.
Glencore’s combative chief executive Ivan Glasenberg was forced into a rare climbdown, outlining plans last September to slash the dividend, raise cash from shareholders and sell assets in order to reduce the company’s borrowings.
One year on, Mr Glasenberg and Mr Kalmin will be looking to demonstrate that they are following through quickly on their plans to deleverage the company, having moved, eventually, more aggressively than peers.
By scrapping $2.4bn of dividend payments, completing a $2.5bn share offering and selling more than $3bn in assets, Glencore is on its way to hitting a net debt target of $17bn to $18bn by the end of this year, down from almost $30bn in the middle of 2015.
“No other company in the peer group has reduced indebtedness as quickly or by as great a magnitude, and the scope for further debt reduction remains high,” said Alon Olsha, analyst at Macquarie. “We believe that management’s credibility has been restored.”
Glencore’s shares have recovered to 188.6p, up 175 per cent from last year’s low, but remain below their 2011 flotation price of 530p.
The company’s earnings for the first half of 2016 are still expected to be lower than those for the same period last year, however, because of the pain felt by its mining unit through the ongoing commodities slump.
The consensus analysts’ forecast for Glencore’s adjusted earnings before interest, tax, depreciation and amortisation — its preferred measure — is $3.9bn for the six months to June 30, down 16 per cent from $4.6bn in the same period one year ago.
The prices of most of Glencore’s key mined commodities averaged less in the first half of the year than during the same period in 2015, although many have since rebounded. Copper, which generates about a quarter of the company’s underlying earnings, is flat.
Investors will also be looking at the performance of Glencore’s trading unit, which makes money from moving millions tonnes of commodities around the world.
Some shareholders are concerned that trading conditions, especially in agricultural markets, have not been strong in the first six months of 2016.
Still, certain analysts are starting to ask if Glencore might return to buying assets after this period of scaling back and balance sheet reinforcement.
“Does the company remain committed to debt reduction or move back to a more growth-focused approach,” said Liam Fitzpatrick, analyst at Credit Suisse.
Glencore has said it is targeting a higher credit rating — it is currently one notch above junk status — and will only resume dividend payments once it has further improved its ratio of net debt to earnings.