Glencore back in the good books of Wall Street

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In the late summer of 2015, Glencore was evidently sized up by the hedge funds as a potential Lehman Bros.

Debt at the world's biggest commodities trader, and one of the biggest miners, was way too high, at almost $30-billion (U.S.). Prices for copper and other metals were sinking. The situation became critical when South African investment firm Investec on Sept. 28 of last year said Glencore's equity value "could evaporate" if commodity prices did not rise and CEO Ivan Glasenberg did not implement a "substantial restructuring."

Much to the delight of the hedge funds, which had been shorting the shares with alacrity, Glencore fell 29 per cent the next day, hitting an all-time low of 67 pence on the London Stock Exchange – 87 per cent below their 2011 initial public offering price of 530 pence. They were even more delighted by Mr. Glasenberg's curious inaction. Typically hard charging, he seemed to be resisting a deleveraging exercise that could restore confidence in the company.

But truly shocked by the share price collapse, Mr. Glasenberg overcame his initial reluctance to go onto war footing and launched a strategy to transform the company with remarkable speed, even if it meant shrinking his cherished creation. Today, Glencore's revival is being touted as the corporate turnaround of the year. The London-traded shares are up some 209 per cent over 12 months, to 277 pence, giving the company a market value of £40-billion.

Glencore is now back in the good books of Wall Street and the City of London. Most analysts who cover the company have given Glencore a buy or hold rating. "Glencore has gone from a position of weakness to a position of strength this year," Jeffries' mining analysts, who have a 350-pence target on the shares, said in a December note.

The overhaul has also put Glencore back into growth mode after a year of uncharacteristic retrenchment. In mid-December, Glencore and the Qatar Investment Authority (QIA) jointly purchased a 19.5 per cent stake in Rosneft, Russia's biggest oil company, for $10.8-billion.

More deals will come, perhaps with the Qataris at Glencore's side. "We're always opportunistic and what we have done is put the balance sheet in a very strong position," Mr. Glasenberg said.

But Glencore has a long way to go before its glory status is restored. The company is still worth only about half its IPO price and last year's gains will be hard to repeat in 2017.

David Neuhauser, managing partner of Chicago-area hedge fund Livermore Partners, said the easy money at Glencore has been made. In a case of lucky timing, Livermore bought Glencore at 70 pence a share and saw the investment more than triple in value as Mr. Glasenberg went into overdrive. "We had a great run, but there are lots of uncertainties out there," he said, confirming that Livermore had sold most of its position.

Why did Mr. Glasenberg swing into action when he did? In short, he came to the realization that Glencore was being punished for a heavy debt load when investors were losing faith in the "stronger for longer" theory that he had been promoting for years.

The conviction was built on the belief that China's voracious demand for commodities would be the gift that would keep on giving for years. Mr. Glasenberg still believes in the enduring Chinese growth story, but investors evidently concluded that China's growth rates, while still lavish by Western standards, would become ever smaller.

As the short sellers feasted on Glencore's falling shares, much to Mr. Glasenberg's frustration, a brutal debt-reduction plan was put into motion: Crunch the debt through asset sales, raise equity and save cash by suspending the dividend and throttling back capital spending.

The goal was to remove the shares' appeal to the funds that were betting Glencore's equity value really could go to zero, as Investec had warned. "Certain investors within the market look for holes to try to exploit based on their opinion of expected earnings and commodity prices," Mr. Glasenberg said.

An unstated goal was to restore Mr. Glasenberg's image as the savviest and most aggressive operator in the global commodities industry.

The fix-it job was Mr. Glasenberg's first big test since the 2008 financial crisis, when Xstrata, another overleveraged wonder then 34-per-cent owned by Glencore, went into near meltdown (Glencore bought the 66 per cent of Xstrata that it did not own in a $29-billion all-share deal in 2013).

Mr. Glasenberg, now 59, had a formidable reputation in the trading and mining world for smart timing, pushing his partners to the limits of their endurance – he once boasted that the notion of a work-life balance was alien to Glencore's culture – and shark-like aggression.

He was born in South Africa, trained as an accountant and earned an MBA from the University of Southern California. He became the race-walking champion of both South Africa and Israel in his youth and missed competing for Israel in the 1984 Olympics because of a technicality involving his nationality. His first big career opportunity came in 1984, when he joined Marc Rich's Swiss trading shop as a coal specialist.

Mr. Rich, a Belgian who died in 2013, made fortunes trading commodities and pioneered "combat trading" – securing the rights to commodities from pariah states or countries in turmoil. His company traded with Iran during the hostage crisis, South Africa during apartheid and Libya and Cuba during the U.S. trade embargoes. In 1983, he was indicted in New York for racketeering, tax evasion and trading with the enemy (Iran). Mr. Rich was the most wanted fugitive in U.S. history until his pardon by Bill Clinton on his last day as U.S. president in 2001.

In 1994, when it had become apparent to Mr. Rich's team that Mr. Rich was more liability that asset, he sold Marc Rich + Co. to his managers, one of whom was Mr. Glasenberg. They recast it as Glencore and turned it into a Swiss-based trading powerhouse. Mr. Glasenberg became CEO in 2002.

By 2008, Glencore had revenue of $152-billion, well more than double that of BHP Billiton Ltd., the world's biggest mining company. The IPO came three years later. A year after that, Xstrata, which had won the bruising 2006 takeover war for Canada's Falconbridge, came into the fold. By then, Mr. Glasenberg was king of the commodities world. That status would not last long.

By mid-2014, commodity prices were plummeting and the big mining houses, some of which had made hugely expensive bets on mining projects during the glory years, saw their share price sink at alarming rates. BHP Billiton, Rio Tinto, Vale, Anglo American and other responded by killing or suspending projects, selling assets and clamping down on costs. But Glencore remained curiously idle.

Mr. Glasenberg said he thought that Glencore could tough it out with a high leverage ratio, meaning net debt at about three times earnings before interest, tax, depreciation and amortization (EBITDA), as it always had. In August, 2015, Glencore expected to have full-year EBTIDA of about $9-billion and net debt of about $27-billion by the end of 2016, putting it within the 3:1 ratio. The ratios at other big mining companies were about half that level.

The hedge funds, seizing upon Glencore's fall in trading income and sinking commodity prices, thought that EBITDA would come in much lower and launched their assault. "The market made it clear to us that we had to run a more conservative balance sheet," Mr. Glasenberg said. "There would have been less focus on us as a private company, but we had to listen to the concerns of our investors who wanted us to have a stronger balance sheet."

The ruthless deleveraging will allow Glencore to finish 2016 with net debt of $16.5-billion to $17.5-billion. That's a drop of $12.5-billion over 18 months. The dividend was suspended and asset sales, worth $6.3-billion, were way over the initial target. One key sale saw the Canada Pension Plan Investment Board pay $25-billion for 40 per cent of Glencore's agriculture trading and infrastructure business. The British Columbia Investment Management Corp. came in for 10 per cent, paying $625-million.

The turnaround has allowed Glencore to restore its divided, with a planned payout of $1-billion in 2017, for a 2 per cent yield. Debt will keep falling and free cash flow should keep rising as prices for coal, copper, zinc and nickel bounce back.

While Mr. Glasenberg shies away from making commodity price forecasts, he notes that no big mines are under construction anywhere in the world, the result of the capital spending cutbacks in recent years. Chinese demand has hardly faded away and infrastructure spending in the United States is expected to ramp up under the Donald Trump presidency, all of which should have positive effect on prices in 2017. "We think this company is well positioned for the future," he said.

A year ago, a similar comment would have been considered a joke.