UPDATE 2-Glencore slumps 30 percent as debt fears grow

28 Sep 2015 | Author: | No comments yet »

Commodities group Glencore sees share price plunge after warning from investment bank.

Commodity prices have been dented for a variety of reasons, but all have suffered from worries over the scale of the slowdown in China, which has had a voracious appetite for commodities. LONDON – Commodities group Glencore PLC saw its share price plunge by around a third at one point Monday after a warning from an investment bank stoked concerns over the ability of the company to service its sky-high debts — if battered commodity prices don’t recover.LONDON (Reuters) – Glencore shares tumbled more than 30 percent to an all-time low on Monday on fears that the mining and trading company was not doing enough to rein in its debt to withstand a prolonged fall in global metals prices.The battered Glencore PLC stock fell further out of favor on Monday, as investors questioned the commodity giant’s ability to tackle its staggering debt pile and deal with commodity prices lingering at multiyear lows.Industrial profits tumbled 8.8 percent from a year earlier, with the largest drops in producers of coal, oil and metals, the National Bureau of Statistics said Monday.

China’s stock-market plunge and currency devaluation are adding new challenges as the country struggles with excess capacity, sluggish investment and weaker manufacturing. Investec analyst Hunter Hillcoat warned that Glencore could end up in the situation where it’s “solely working to repay debt obligations” if commodity prices don’t recover. Sentiment toward Glencore, which is based in Switzerland but has a share listing in London, has been fragile for months as investors have fretted over the impact of lower commodity prices on earnings and the company’s ability to meet its debt repayments. Swiss-based and London-listed Glencore earlier this month raised $2.5 billion through a share placement, part of a wider plan to cut its net debt by a third by the end of 2016. They topped by far the list of losers in the U.K.’s FTSE 100 index UKX, -2.07% and the pan-European Stoxx Europe 600 index SXXP, -1.85% Glencore GLEN, -25.63% GLCNF, -25.68% shares have now lost 76% in value year-to-date, as the miner and trader struggles with weak results, slumping metals prices and broader concerns about its balance sheet.

Glencore Plc sank to another record low as Investec Plc warned that there was little value for shareholders should low commodity prices persist. “Chinese industrial profits came in far lower than before, and that gave traders a bit of a scare,” Sergey Raevskiy, a mining analyst at SP Angel Corporate Finance LLP in London, said by phone. “With commodities so weak, Glencore was a natural target.” Copper for December delivery on the Comex dropped 2.2 percent to $2.233 a pound at 8:10 a.m. in New York. Under such a scenario, Hillcoat said value for Glencore equity holders is “virtually eliminated.” That unappetizing proposition prompted a savage sell-off of Glencore shares, which at one stage Monday were down 32 percent at a record low 66.7 pence. Glencore’s top individual shareholders, according to Thomson Reuters Eikon data, include CEO Ivan Glasenberg, with an 8.4 percent stake, and Qatar Holding, with 8.2 percent.

Investec analysts suggest Glencore’s equity value could evaporate against its large debt pile unless commodity prices improve or the company launches a substantial restructuring. “Despite the drastic action that management has announced recently (even assuming all of the measures are successfully implemented), a spot-price scenario results in an almost complete collapse in forward earnings such that no meaningful estimate of shareholder value can be derived under our price-earnings methodology,” they said a note on Monday. As part of its recently-announced strategy to pay down debt, Glencore on Monday said it’s selling its Araguaia nickel project in Brazil to Horizonte Minerals PLC HZM, +3.87% for a discounted price of $8 million. Glencore’s fall from grace has gathered pace ever since it floated in 2011 at a share price of 530 pence, a listing that valued the company at a little less than 40 billion pounds ($60 billion). Monday’s fall spread to the broader UK mining sector, which has also felt the pain from an emerging-markets slowdown and a crash in commodities prices. Naeem Aslam, chief market analyst at AvaTrade, welcomed the company’s efforts to selloff noncore assets to tackle debt, noting the shares could be in for a turnaround in the near term. “Most of the current price plunge is mainly due the concerns around the company debt issue, and this is very much punishing the price action,” Aslam said in a note. “But you cannot ignore the management’s action, which is taking absolutely correct action to reduce its debt, and we believe soon the commodity price stabilizes [and] the firm will be a value buy,” he added.

Miners — not just Glencore — sought to take advantage of China’s booming economy at the turn of the decade when many of the world’s leading economies were struggling to emerge from the global financial crisis and the ensuing recession. The note pointed to high debt levels and a need for deeper restructuring. “If major commodity prices remain at current levels, our analysis implies that, in the absence of substantial restructuring, nearly all the equity value of both Glencore and Anglo American could evaporate,” analysts at Investec wrote. The outlook for China’s economy was also a drag on markets, with forecasts pointing to a likely shrinking of the country’s giant factory sector for the second month in a row.

After Glencore announced its debt-cutting plans, Moody’s credit-rating agency affirmed its Baa2 rating on the company but changed the outlook to negative, from stable, “to reflect the scope for a prolonged difficult market that may cause a slower recovery in Glencore’s financial profile”.

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