For a while it looked as if Glencore PLC had turned the tide.
Billionaire CEO Ivan Glasenberg's $10-billion (U.S.) debt-cutting plan, vivified with asset sales and output cuts, breathed life into a collapsing share price. Now with the stock falling again, pressure is back on to drive those efforts harder and faster.
Before Wednesday, the Swiss firm had dropped for nine straight days in London, the longest streak on record. The 29 per cent slump in that period, as prices for the copper and zinc that Glencore produces reached six-year lows, wiped about $8-billion off the mining and trading company's value.
"If all else remains unchanged, it's going to be back to the drawing board," said Marc Elliott, the mining analyst at Investec PLC whose bearish research note seven weeks ago was a spur for a record daily decline in Glencore's shares. "Perhaps not to the same degree, but they're going to have to take more action." Mr. Elliott advises investors to sell.
Glencore has lost $45-billion in market value this year amid a commodities rout that is crushing prices from aluminum to oil and tin, presenting Mr. Glasenberg with his greatest challenge since becoming CEO in 2002. While he's hitting debt-cutting milestones – a $2.5-billion share sale, a $900-million asset disposal, $2.4-billion saved by halting dividends, progress offloading a stake in the company's agriculture business – the question is whether tumbling demand in China, the biggest commodity consumer, won't overcome all endeavours.
Mr. Glasenberg cleared one hurdle on Sept. 28, when the stock tanked 29 per cent as Investec questioned whether weak metals prices would erase Glencore's equity value. The shares recouped all their losses within a week and headed higher on a flurry of statements on cutting mine output and selling assets, as well as calming words on the producer's solvency.
Double value
At one point, the stock more than doubled its value from the nadir. But for all his efforts and undoubted talents, even Mr. Glasenberg can't hold back the sea. As long as prices for the commodities that Glencore mines keep sliding, the weakness will play out in its shares. Glencore's shares in London fell as much as 3.5 per cent on Wednesday, the lowest intraday level since Sept. 30, before rebounding to close 5-per-cent higher at 93.31 pence.
"I don't think the risk around Glencore is getting much worse," Chris LaFemina, a mining analyst at Jefferies LLC with a hold rating on the company, said by phone. "Commodity prices are going against them and that's the problem. They are fighting an uphill battle."
At current prices, the company would generate $7.3-billion of earnings before interest, taxes, depreciation and amortization next year, according to Chris LaFemina, a mining analyst at Jefferies LLC with a hold rating on the company. Another 10-per-cent drop in commodities would slice about $1-billion off that figure, he said.
A spokeswoman for Glencore declined to comment when contacted on Tuesday.
"Glencore has basically enacted on the plan it's laid out and is working through that plan, and credit to them for doing it," Clive Burstow, who helps manage $35.6-billion at Baring Asset Management Ltd. in London, said by phone on Nov. 11. "In general though, they have been hit by a broader concern, which is the sector seeing a selloff."
Net borrowing
Copper is down 9.8 per cent since Glencore announced its $10-billion debt-reduction program on Sept. 7 and was at a six-year low as of Tuesday. Zinc has fallen 15 per cent and thermal coal, of which Glencore is the No. 1 exporter, has sunk 7.6 per cent. That hurts its income, but also the value of mines and stockpiles it uses to calculate net borrowings.
The company's €400-million ($427-million) of 3.7 per cent bonds maturing in October, 2023, dropped 2.3 cents on the euro this month to an almost seven-week low of 82.1 cents, according to data compiled by Bloomberg. The yield has risen to 6.7 per cent, the data show.
Mr. Glasenberg, a South African renowned for his fierce intelligence in deal-making, has worked for the Swiss firm for more than three decades. He steered Glencore through a China-led commodity boom, a $10-billion London listing in 2011 and a $29-billion takeover of coal exporter Xstrata PLC two years later, when prices neared their peak. As recently as last year he was plotting an audacious takeover of larger competitor Rio Tinto Group.
Only with recent turmoil have there been any murmurings on how he runs the business. Still, with an 8.4 per cent holding, a history of increasing value in the commodity business and experience in weathering past storms, Mr. Glasenberg's position appears secure.
Untouchable Ivan
"Any kind of decline in metals prices like this puts the leveraged players under extreme pressure," Paul Gait, a Sanford C. Bernstein Ltd. mining analyst in London, said by phone. "What this does is it clearly puts pressure on Ivan and the management of Glencore to really accelerate that debt reduction target."
As part of the debt plan and associated share sale in September, the billionaire and senior managers invested more than $500-million back into the company – the CEO's personal commitment was about $210-million to maintain his shareholding. That's as the value of the former Olympic standard race-walker's stake in the company has slumped to near $2-billion currently, from close to $9-billion at the time of Glencore's initial public offering.
This year, the company is the worst performer on the U.K.'s key FTSE 100 Index of stocks.
"I suspect that he is under pressure," said Rob Clifford, an analyst at Deutsche Bank AG. "They've lost their mojo somewhat. But over the decades he's got more right than he's got wrong, so that will carry him through. If you want to be an investor in Glencore, you've got to think like Ivan. You've got to be prepared to be in there for some years. You tip money in the down years and you take it out in the up years."
