Much progress made but the song remains the same
What's changed
We update our estimates for Glencore following the completion of its equity
placement on September 16, in which it raised its target of $2.5bn. We also
update our estimates to incorporate our commodity analysts’ lower thermal
coal forecasts ($58/54/52/t for 2015/16/17E) and lower met coal forecasts
($91/85/90/t), which impacts Glencore’s 2016/17/18E EBITDA by c.15-18%.
Implications
Since announcing c.$10bn of debt reduction measures on September 7 and
completing a 9.9% equity placing, shares have retreated a further 14%. In our
view investors are not yet convinced that Glencore has gone far enough to
totally allay fears that the industrial assets can service the new lower debt level.
Our scenario analysis suggests that using GS estimates for commodities prices
and FX rates, Glencore’s IG rating would be secure in the medium term, but
our estimates for zinc, nickel and coal prices are higher than spot prices. When
we run the same analysis using spot commodity prices and spot FX rates, most
of Glencore’s credit metrics would be at the border of required ranges to
maintain its IG rating. Finally, a 5% drop in spot commodity and flat FX would
see most of Glencore’s credit rating metrics fall well outside the required range
to maintain its IG rating, suggesting concerns would quickly resurface.
Glencore has a few levers left – further lowering capex, signing streaming
deals and releasing more working capital. Recent underperformance
suggests that the measures exercised are insufficient and more is needed.
We remain Neutral rated but expect continued volatility in the near term.
Valuation
We value Glencore using a SOTP approach with three components: (1)
industrial assets at 5x 2016E EV/EBITDA; (2) the marketing division at 15x
2016E P/E; and (3) the listed entities using closing prices on September 22.
On lower estimates we reduce our 12-month price target to 130p (was 170p).
Key risks
Commodity prices, streaming agreements and FX moves are key risks.