The strongest rally in Glencore PLC's trading history allowed the world's leading commodities trader to recoup last week's deep losses as investors bought into CEO Ivan Glasenberg's turnaround plan.
In London, the shares closed at £1.15 ($2.28), up 21 per cent. The price was 72 per cent above its year low on Sept. 28. Still, the shares are down 65 per cent since this time in 2014 because of slumping commodity prices and investor fears that Glencore is carrying too much debt when profits are shrinking.
In overnight Hong Kong trading, Glencore surged more than 70 per cent on speculation that it is open to takeover offers and is close to selling its Canadian agriculture business. Analysts dismissed the Hong Kong trading as essentially meaningless since Glencore shares have very little liquidity in that market and are prone to wild swings.
Monday's rise in both markets was so sharp and fast that the Swiss company was forced to put out a statement denying that any deal was imminent. It said "the board confirms that it is not aware of any reason for these price and volume movements."
The share surge came after a week of wild price swings that saw Glencore shed almost a third of their value early last week. Talk of a deal was partly behind the price rise.
On Friday, Reuters reported that Glencore is in talks with a Saudi Arabian sovereign wealth fund, a Chinese grain trader known as COFCO, along with Canadian pension funds, to sell a stake in the Canadian agriculture assets that operate under the Viterra banner. Glencore bought Viterra, Canada's biggest gain handler, in 2012.
Two days later, London's Telegraph newspaper said that "Glencore would listen to offers for a takeover of the entire company but its management does not believe there are any buyers willing to pay a fair value for the business in the current market." The Telegraph report did not cite any Glencore sources and was not taken seriously by analysts. Glencore management has always said any public company is for sale at the right price. The company's statement suggests no approach has been made by potential bidders.
While some analysts think Glencore is a risky bet because of its high net debt, others think Mr. Glasenberg's plan to pay down debt rapidly will reverse the company's fortunes. "The belief that Glencore is having a 'Lehman moment' seems unfounded," Bernstein analyst Paul Gait said in a Monday note. "While the leverage is clearly a concern, it is not anywhere near an immediate existential threat to the company – it is an issue that needs to be managed, and that is exactly what the company is doing."
Glencore took on a lot of debt in 2013, when it bought Xstrata, the mining giant that owns Canada's Falconbridge. At last count, the company had net debt of $30-billion (U.S.). The sell-off last Monday came after investment firm Investec suggested in a note that Glencore's equity could be wiped out if commodity prices were to remain weak.
In response to the tumbling share price, Glencore has vowed to reduce debt by $10-billion. Last month, Glencore raised $2.5-billion and suspended two dividend payments. Some analysts think the company would be willing to sell all of its Canadian agriculture division instead of just a minority stake.
Speaking on a panel in London at the Financial Times Africa Summit, Mr. Glasenberg made no comment on the extreme volatility in recent weeks in Glencore's share price. But he urged rival mining companies to close copper mines to bring the market back into balance. "If you're not making money, I believe you should take production out and reduce supply," he said. "Don't create oversupply in the market for no reason."
Glencore last month announced it would shut production at two African copper mines, one in Zambia, the other in the Democratic Republic of Congo. Together, the mines are responsible for about 2 per cent of global output.
The copper glut and falling copper price have propelled Glencore's share plunge over the past year. Copper prices have been in decline since 2011. Copper futures have lost 22 per cent in the past year alone, as demand growth in China, which consumes about 45 per cent of global output, wanes. Goldman Sachs predicts that Chinese copper consumption, which had grown by 7.5 per cent a year in recent years, will not grow this year or in 2016.