UK Edition
Questor: Glencore is worth a punt (if its boss can stop making deals)
Just like Jamie Dimon in the banking world, Ivan Glasenberg is a study in staying power. Mr Dimon has seen JP Morgan Chase through the financial crisis and holds exalted status on Wall Street, recently lambasting the “stupid s---” Americans have to deal with and laying into Washington’s legislative gridlock.
Mr Glasenberg, chief executive of Glencore since 2002, has similarly clung to power despite the commodities boom turning to bust and claiming the scalps of almost all of his executive peer group.
That is despite contributing to what many thought might have been his own downfall. The South African pushed through the takeover of mining giant Xstrata in 2013, loading the business with debt to reunite two businesses just as dark clouds were massing over the sector.
Glencore might have weathered the storm better if it had stuck to its roots as a commodities trader. Instead, Mr Glasenberg insisted on following an integrated model by digging deeper into the mining of copper, coal and nickel.
It was a case of near-fatal extraction. From listing its shares in 2011 at 530p, when Glencore was forced to tap shareholders in a £1.6bn fundraising, just four years later the new equity was priced at 125p. Any other boss forced to take such remedial action to cut $30bn (£23.2bn) of borrowings down to size would have paid with his job. But Mr Glasenberg is not any other boss. It helps that 20pc of the company is owned by the billionaire “band of brothers” that built it up over decades. It begs the question to what extent Glencore is being run for them, rather than in the best interests of all shareholders.
Certainly, the in-house investor base insulates Mr Glasenberg from the kind of shareholder activism that has been focusing minds at BHP. The question now is whether he is a reformed character. The company declared last December that its debt reduction programme was over and the dividend would be reinstated in 2017. What helped was a fresh surge in commodity prices and an uptick at Glencore’s trading arm, which sells and ships everything from coal to grain. After falling down a mineshaft, the shares are up more than fourfold from their nadir early in 2016.
There is every hope that better will follow. Barclays forecasts a decent results season for the miners given stronger-than-expected commodity prices and disciplined capital expenditure. At 6.5pc, China has set itself the lowest economic growth target in 25 years, but a 6.9pc expansion in the second quarter did much to reassure investors.
Keeping a lid on supply should give companies scope to carry on paying down debts, as well as boosting cash returns – although the big decisions on what to do with the surplus will probably wait until the year-end. Mr Glasenberg has already shown he would rather revert to his deal-making ways than shovel cash into investors’ pockets. In May, Glencore declared it had made an informal approach to grain trader Bunge regarding a possible “consensual business combination”. More recently, it was scuppered in its pursuit of Rio Tinto’s Australian coal assets. There is room for plenty more. Analysts at Jefferies say Glencore’s balance sheet is the strongest it has been since flotation, adding that at current spot commodity prices its borrowing ratio should be lower than Rio Tinto, BHP and Anglo American by the end of 2019.
The big difference this time around is Glencore’s remarkable conversion to “financial conservatism”. If it had been successful with the purchase of Rio’s coal business, it pledged, ahead of time, to sell off at least $1.5bn of assets to mitigate the outlay. If it pursues Bunge, it could do so in partnership with the two Canadian pension funds that snapped up 49pc of Glencore’s agriculture arm during its disposal programme.
Trading at 11 times next year’s forecast earnings, the City appears yet to have fully factored in rising commodity prices. Glencore shares are worth a short-term punt at this point in the cycle but for fewer shocks in this sector, investors might be better off looking at Rio Tinto. Incidentally, Rio is another company that Mr Glasenberg has long coveted. With a balance sheet back to strength, could he resist? Another reason the shares remain a risky buy.
Questor says: buy
Price at close: 313.55p