What does Glencore boss Ivan Glasenberg know about the global economy that no one else knows?
As commodity prices sink on fears of a double-dip recession, mining shares, including Glencore’s, are dropping to the bottom of the coal chute. If the hot money that rushed into mining investments in post-crunch 2009 rushes out just as quickly, the 20 per cent to 30 per cent price falls since the start of the year might seem benign. The mining industry’s deal flow is slowing.
To Mr. Glasenberg, apparently, the grim news is welcome. He has been buying and intends to keep doing so as the froth disappears from the sector. This week Glencore, the world’s largest commodities trader and a rising force in the mining world, launched an $268-million (Australian, $281-million U.S.) bid to buy the 27 per cent of Australian nickel miner Minara Resources that it does not already own.
Glencore’s next target is widely expected to be Optimum, South Africa’s fourth biggest coal exporter. Glencore has been in talks with potential South African partners about a bid that might value Optimum at about $1-billion (U.S.) (with the rush to close nuclear power plants in Germany and elsewhere, coal suddenly seems to have a bright future). Meanwhile, Mr. Glasenberg is pursuing smaller bolt-on investments and has never hid his burning desire to take full control of Xstrata, the Anglo-Swiss mining group that bought Canada’s Falconbridge in 2006 and later tried, without success, to nab mighty Anglo American. Glencore already owns 34.5 per cent of Xstrata.
In a conference call on Thursday, Mr. Glasenberg said Glencore is simply doing what Glencore does best, which is to pounce on assets it thinks are cheap before rivals get the same idea. “The turmoil in the market has allowed us to look more aggressively at opportunities, because not everything is as high-priced as it was a few months ago,” he said. “Is this the bottom? I don’t know. It is definitely a better time and an opportunistic time to look at acquisitions.”
He is confident that Chinese demand, driven by rapid urbanization, will underpin commodity prices. He does not expect a second financial crisis.
Is he right? Impossible to say, but he and Glencore have been more right than wrong for decades. As half trader, half miner, Glencore has a global intelligence network that makes the CIA look like your grandmother’s coffee club. It has been adept at forecasting commodity prices, based on intimate knowledge of production, demand, regulations, political whims and transport costs and movements everywhere. Glencore’s May initial public offering turned Mr. Glasenberg, a South African accountant, into a multi-billionaire. He owns 16 per cent of the company.
Glencore can be opportunistic on acquisitions and investments in good part because it has a sweet balance sheet. Strong profits and cash flow -- half-year earnings before interest and tax rose 50 per cent to $3.3-billion -- have given it enormous firepower. The company has $10-billion of liquidity and net debt to EBITDA has more than halved since last year.
That means more acquisitions are in the pipeline, unless, of course, Mr. Glasenberg has wildly miscalculated global commodity demand. Don’t count on it.