Glencore positions itself for growth with 'imminent' IPO

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Glencore International AG is on the verge of launching what could be Britain's largest initial public offering to date, one that would give the commodities trader the ability to play the mining consolidation game as the commodities rally powers ahead.

Investment bankers expect the IPO documents to be filed as early as Thursday for a deal that would value Glencore at about $60-billion (U.S.), almost double the worth implied by the sale of convertible bonds in late 2009. In an interview with the Financial Times, Glencore chief executive officer Ivan Glasenberg said the IPO was "imminent," but would not provide a date.

Based on the latest valuations, the expected sale of 20 per cent of the company would raise as much as $12-billion.

Glencore has been planning for the sale of the shares, which are to be listed in Hong Kong as well as London, for at least a year while it danced with Xstrata PLC, the Anglo-Swiss mining group that bought Canada's Falconbridge in 2006. Glencore had hoped that Xstrata, which is 34-per-cent owned by Glencore, would agree to a merger. If that had happened, Glencore would have gained a stock market listing by default, because Xstrata trades in London.

Analysts say the Glencore IPO will attract a lot of interest from investors everywhere because of its rising profits, sheer bulk and the new allure of commodities traders, such as Hong Kong's Noble Group, as an investment class.

"I would fully expect Glencore equity to attract strong institutional investor interest, including from Canada," Miriam Hehir, credit analyst in London with RBC Dominion Securities, said in an interview. "This has been very well flagged for a long time. Even sector investors not involved in Xstrata would have been taking a look."

Complexities

Glencore's equity might find strong support among big-name institutional investors such as asset manager BlackRock, which invested in Glencore's convertible bonds. But the company's complexity might make the shares less appealing to small investors.

While Glencore is known as a commodities trader, 62 per cent of its 2010 earnings before interest, taxes, depreciation and amortization (EBITDA) of $6.2-billion came from "industrial" sources - mining operations. They ranged from the 74-per-cent-owned Katanga Mining, which is listed in Toronto, to 100-per-cent-owned Prodeco Group, a Colombian coal miner.

Hybrid trading and mining groups are rare. Glencore's listed assets have a public value and the implied value of the non-listed assets can be easily estimated. Assigning a value to the more volatile trading side (which includes substantial logistical operations such as ports and shipping) is more difficult. "There is no direct comparable company to Glencore," Ms. Hehir said.

In February, London's Liberum Capital valued Glencore's equity at about $61-billion. Of that total, about a third came from the trading operations. Last year, Glencore made $3.8-billion in profits on sales of $145-billion.

Glencore's predecessor company was founded in Switzerland by Marc Rich, the trader who pioneered "combat trading" - gaining the trading rights to commodities in pariah states or countries in turmoil. He was indicted for tax evasion in the United States and was pardoned by Bill Clinton on his last day as president in 2001.

A team of senior Marc Rich + Co. traders bought out Mr. Rich's trading business and renamed it Glencore. One of them was Mr. Glasenberg, the South African accountant who became Glencore's CEO in 2002.

Why List?

Glencore has made it known that positioning the company for growth, in the belief that the commodities cycle will endure, is one of the main reasons behind the IPO. With access to the public equity markets, Glencore would have greater ability to buy working mines, smelters and refineries. Ownership would also give Glencore the marketing rights to their output.

The other main reason for a listing is to give Glencore's partners the ability to sell their equity without the need to sell assets or deplete working capital. Glencore would be able to monetize the partners' equity easily, preventing "cash from walking out the door," to use one banker's expression.

Glencore had coveted a merger with Xstrata, one of the world's largest mining companies. In a research report written last year, when rumours of a Glencore-Xstrata merger were strong, Liberum Capital said putting the two companies together would create a formidable trading and mining colossus that could "deliver the scale to undertake very large capital projects or transformational M&A."

But Xstrata CEO Mick Davis resisted the idea and Glencore never launched a formal merger proposal. Executives close to Mr. Davis said he wants to see a market value for Glencore shares before considering a merger.

Louis Dreyfus

While Xstrata doesn't shy away from big takeover attempts like Falconbridge, Glencore on its own would target companies worth about $5-billion, Mr. Glasenberg told the Financial Times.

A business that reportedly appeals to Glencore is France's Louis Dreyfus, one of the biggest traders of agricultural commodities such as rice, orange juice, wheat and sugar. In a recent interview in the French financial newspaper Les Echos, chairman Margarita Louis-Dreyfus said "the group has numerous projects for which we need money. All options are possible, between a stock market listing, a merger or turning to a private investor."

The Glencore IPO will make Glencore's already rich senior partners much wealthier. Assuming the 485 partners own 80 per cent of Glencore after the IPO, and that the company is valued at $60-billion, the deal would give them a paper wealth on average of close to $100-million. But lock-up agreements mean the partners will not be able to sell their holdings for several years.

Glencore is also expected to announce a new chairman when it releases its IPO documents. The share sale is likely to be led by Citigroup, Morgan Stanley and Credit Suisse.