Glencore Needs a Little Privacy – by Liam Denning (Bloomberg Business – September 28, 2015)

Could Mick Davis save Glencore?

That might seem like an odd (or churlish) question to ask: After all, it was Glencore’s decision to buy Xstrata, the mining behemoth that Davis built, which saddled the commodity trading firm with a lot of the debt now weighing on its shares.

The latter slumped 27 percent on Monday to about 70 pence each after Investec Securities released a report speculating that depressed commodity prices could wipe out Glencore’s equity value. That report came just days after one from Goldman Sachs throwing doubt on Glencore’s investment-grade credit rating — a big deal for a trading firm. The shares sank below 100 pence for the first time since 2011’s initial public offering, when they priced at 530 pence apiece.

That 87 percent drop since the IPO makes Glencore the worst-performing major mining stock aside from Vale — which at least has the excuse of being listed in Brazil. Apart from Glencore’s balance sheet having made its stock a pinata for analysts, the crisis raises a more fundamental question: Should Glencore exist in its current form?

Glencore’s trading savvy was supposed to mean it could make money whatever the market climate, giving investors a smoother ride. Bringing Xstrata’s mines fully in-house was meant to make the ride even smoother.

That hasn’t really happened. Looking at earnings per share over the past eight half-yearly periods, Glencore’s swings have been tamer than at Rio Tinto or fellow problem child Anglo American, but wilder than at BHP Billiton. And since its IPO, Glencore’s stock price has been more volatile than all three of those rivals.

The big culprit is debt, which topped $50 billion at the end of June, up from $35.5 billion at the end of 2012, just before Glencore bought the 66 percent of Xstrata that it didn’t already own. Even using Glencore’s own measure, which adjusts Ebitda and treats $17.7 billion of “readily marketable inventories” as cash equivalents, its leverage stands out.

Glencore reported net debt of 2.71 times trailing Ebitda at the end of June. In comparison, BHP and Rio stood at 1.19 and 0.8 times, respectively, according to data compiled by Bloomberg.

That debt leaves Glencore vulnerable to falling prices of copper, coal, zinc and nickel. Its plan to cut the burden by $10 billion, including a recent $2.5 billion rights offering, has been brushed aside.

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