Glencore still eyeing options to raise $2.5bn in new equity
Glencore's new plan to slash its large debt load may have provided shareholders with something to cheer about, but the mining and trading group is keeping the market guessing about one key part of the strategy.
The format and timing of Glencore’s proposal to raise up to $2.5bn of new equity have yet to be decided, although Ivan Glasenberg, Glencore’s tough talking chief executive, and Steven Kalmin, finance director, have warned analysts not to assume they would launch a rights issue.
“We have just said that we are proposing an equity issuance,” said Mr Kalmin on Monday, as the debt reduction plan was unveiled. “There’s a range of potential options, instruments, structures available obviously.”
Glencore’s shares closed up 4 per cent on Tuesday to 137.6p, having jumped 7 per cent on Monday, after the UK-listed group committed to cutting its net debt by about one-third to just over $20bn by the end of next year.
Investor concerns about Glencore’s high leverage compared with competitors have been one important factor behind its shares being the worst performer in the FTSE 100 index over the past year.
Another key factor has been China’s economic slowdown, and the slump in commodity prices. Glencore, like other large miners including BHP Billiton and Rio Tinto, rode the China-led commodities boom of the previous decade, but its share price has fallen about 60 per cent since September last year.
Glencore’s apparent caution about embarking on a rights issue — where new stock is offered to existing shareholders in proportion to their stakes — may be rooted in how they are seen by some as time-consuming and bureaucratic.
Among other things, Glencore would have to call a meeting of shareholders, who would be asked to approve the capital increase.
“There’s no pressure on the company to do a particular structure,” said one person familiar with the company’s thinking. “There’s a very open dialogue with the shareholders about what they would like Glencore to do and when they should do it.”
Rather than a rights issue, Glencore could opt for an equity placing with a limited group of institutional investors, or issue a form of convertible debt, according to bankers. A combination of both is also possible. Under UK rules, Glencore can issue new equity amounting to 9.9 per cent of its existing stock without needing approval from its shareholders.
Sylvain Brunet, analyst at Exane BNP Paribas, said the depressed nature of Glencore’s share price over the past year meant issuing convertible debt “would make more sense than equity in our view”.
Analysts at Investec Securities said Glencore’s proposal to raise new equity “could be construed as a masterpiece of spin” designed to spook short selling funds that have bet against the company’s stock in recent months.
Glencore data
“Timing on the proposed capital raise appears to be at management’s volition, may never happen and may even take the form of a quasi-debt security,” they added. “This plan appears designed to paralyse the short sellers, and so far it appears to have worked.”
Whatever form the new equity takes, Mr Glasenberg made clear on Monday that management, which holds a combined stake of more than 20 per cent in Glencore, will not be diluted. Senior management, who became paper billionaires when Glencore listed four years ago, would be responsible for contributing up to $550m in the equity issuance.
The aim of Glencore’s debt reduction strategy is to preserve its investment grade credit rating. A downgrade of the Swiss-based company’s rating — Standard & Poor’s currently has it two notches above junk status — would hurt Glencore more than rivals. This is because its large trading business requires cheap finance to move millions of tonnes of oil, coal and copper around the world each day.
Mr Glasenberg said the debt reduction plan — which as well as equity issuance involves the suspension of Glencore’s dividend, asset sales and a halt to copper production at two African copper mines — had steeled the group balance sheet for “Armageddon”.
But analysts said the strategy will not completely shield Glencore from a further dip in commodity prices.
“We are encouraged by the fact that Glencore is finally taking actions to weather the ongoing storm, said Christopher LaFemina, analyst at Jefferies. “However, our analysis indicates that it is too early to buy Glencore shares as macro economic risks are high and the company still has significant financial leverage and operating risk.”
Peers within the industry said they were impressed by the decisiveness of Glencore’s actions.
Delegates at a Financial Times commodities summit in Singapore said it was characteristic of Mr Glasenberg to tackle problems both aggressively and creatively.
“Get it all done at once ... and show them you still know a thing or two about raising money,” said one commodity executive who has dealt with Mr Glasenberg in the past.