If any company could personify the terrible past year in commodities, it would be Glencore. Owning the world's largest commodities trading operation, it branched out into production at the worst possible time. The 2013 takeover of Xstrata left Glencore one of the most heavily indebted commodities companies in the world, at a time when many commodities were trading at historic lows.
But, after seeing its share price fall by 72%, (making it the second-worst stock of 2015 on the FTSE 100,) Glencore may be turning the corner on a very bad year.
What Went Wrong With Glencore
Seeking to create the first vertically integrated mining and trading company, Glencore acquired coal and copper miner Xstrata in 2013. The idea was to build a completely-controlled supply chain "from mine to market" for more than 90 commodities, using intelligence from the trading arm to adjust production. The acquisition, the largest mining merger in history, made Glencore the 4th largest mining company in the world.
It also saddled the combined company with more than $30 billion in debt, and an extreme reliance on China's appetite for coal and copper.
Sinking With the China Titanic
Glencore is the world's third largest producer of copper, and handles 3% of all global oil trade. It's the tenth-largest company in the world. It is said that Glencore has more ships that the British navy. It is the world's largest zinc producer, at 1.5 million metric tons annually. It is the world's largest exporter of thermal coal, used in power plants.
It based its acquisition of Xstrata on selling all these things to China. Glencore depends on the mining, smelting, and sale of copper and zinc for the major portion of its production revenue. The unexpectedly severe economic slowdown in China has hit Glencore where it hurts. Profits fell by 30% in the first half of 2015, while gross debts exceeded $50 billion. The company had to conduct a $2.5 billion stock sale to raise operating capital. The CEO and other senior executives had to buy $500 million of that stock offering to prevent their holdings from being diluted.
The low point perhaps came on September 28, 2015, when London investment bank Investec floated the possibility that Glencore stock might go to zero with a major restructuring of the company. This caused a panic as investors dumped their shares, causing Glencore's share price to fall 30% in a single day. It also sent the company's bonds below investment grade.
What Is Glencore Doing Right?
While initially criticized for being slow to react to the dire straits the company found itself in, recent moves by Glencore executives to cut its monumental debt load has met with favorable review. Starting the year as the world's most indebted mining company, it has pulled out all the stops in a bold plan to shrink its $30 billion net debt to $16-$18 billion by the end of 2016.
Part of that is cutting zinc and copper production, even though its competitors continue mining at existing levels. In October, Glencore announced it was cutting zinc production by 500,000 metric tons, 1/3 of total production. It has shuttered copper mines in Zambia and the Democratic Republic of Congo for 18 months, in the face of harsh opposition from authorities. it is looking to sell two other copper mines in 2016. It has suspended its full-year dividend, saving $1.6 billion. It has sold future silver production in a streaming deal. It is trying to spin off or sell a portion of its agriculture division, which is Canada's largest agriculture handler.
It sold its South African coal subsidiary after an unfavorable contract with the state-owned power company forced it into bankruptcy. It has cut Australian coal production by 15 million metric tons. Glencore's CEO, Ivan Glasenberg, announced cuts of $1.5 billion in working capital, and of $500 million to $1 billion in industrial capital expenditures.
On December 18, Moodys downgraded Glencore's debt to Baa3, one step above junk bond status. However, they gave the new rating a "stable" outlook, and explained that the downgrade was due to sliding copper prices. Two days later, Glasenberg announced that it would cut even more expenses, with a new target of $13 billion cut by the end of 2016, for a far more manageable total of $18 billion.
Is That Light At The End Of The Tunnel?
Things are starting to look up for Glencore. Recently released earnings estimates for 2016 were above analysts predictions. The CEO's promise of $5 billion in debt retirement by the end of 2015 was exceeded, as $8.7 billion in savings was realized. This is winning the approval of investors, as the #3 stockholder increased his stake from 5.1% to 7.1%.
Perhaps the largest hurdle for Glencore in the near future (besides commodity prices continuing to tank) is the amount of debt it has maturing soon. From mid-2016 through the end of 2017, more than 30% of Glencore's long-term bonds are coming due, at a price tag of $5.8 billion.
While not out of danger, Glencore is facing 2016 in a far healthier position that it greeted 2015. Luckily, its trading arm can make money even when prices are falling.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.