Monday 22 January 2018

Resurgent Glencore can score in commodity uplift

Glencore International CEO Ivan Glasenberg. Photo by Dmitry Azarov/Kommersant via Getty Images
Glencore International CEO Ivan Glasenberg. Photo by Dmitry Azarov/Kommersant via Getty Images

John Lynch

I love big companies with a story attached. When that story would do credit to the creator of 'James Bond', I like it even more. But I'm not sure the late Ian Fleming had the reserves of imagination to have predicted the life and curious times of the major corporation we are examining today, commodity giant Glencore.

Glencore was once described as "the biggest company you've never heard of", and probably for a very good reason. But it is no longer a mysterious conglomerate headquartered at the base of the Swiss Alps, (Fleming would surely have liked the location if nothing else). It is a company quoted on the London Stock Exchange, with revenues currently topping $150bn (€141bn) and an army of traders, accountants and lawyers around the world that is reckoned to be 110,000 strong.

In its current form, Glencore is a significant commodity trading concern with the mines to match. In the world of trading, Glencore is omnipresent (and sometimes controversial). In addition its network gives it real-time market and political intelligence. The group plays a significant role in supplying basic materials to heat and feed the world. Its commodities include oil and gas, coal, aluminium, bauxite, nickel, zinc, copper, grain, rice, wheat, barley and sugar. Nevertheless, in the world of commodities and mining, Glencore is looked upon with both fear and admiration, largely because of its background story.

The company can trace its origins to 1974, when it was called Marc Rich and Company, after its founder. The appropriately named Mr Rich was a man of considerable mystery. He was a commodity trader who fled the US to escape criminal charges including tax evasion.

For a number of years his picture adorned the FBI list of fugitives before he was surprisingly pardoned by Bill Clinton on the former president's last day in office. At various times Rich & Co has been accused of busting UN sanctions and deals with regimes that have been put into the 'rogue' category. However, 20 years after its foundation, Rich severed his ties with the company. He sold out to existing management, known as the Rich Boys, who renamed the company Glencore.

By the middle of 2011, Glencore was floated on the London Exchange.

At the time, it was London's biggest floatation. Following the listing, the company went directly into the FTSE 100 index, where investors who trade the index are obliged to buy the shares. Some worried at the time the floatation was a sign that commodity prices were at the top of the cycle. They guessed correctly. While the stock floated at 530p, it seldom approached those levels again. Indeed, in late 2015 the price was as low as 66p.

A year after its floatation, Glencore bid for Xstrata, another Swiss-based mining company, producing coal, copper, nickel and zinc. It had developed from a small player at the beginning of the millennium into a large diversified group, operating in 18 countries.

Initially billed as a merger of equals, the deal ultimately resulted in a takeover by Glencore and, at a stroke, created a mining and trading powerhouse.

Investors in natural resource shares tend to understand the challenge of its cyclical nature. When commodity prices hit a pothole, share prices plunge; Glencore is no different. It was among the mining companies hit hardest by the fall in prices but has been one of the biggest gainers from the recovery.

Results for 2016 showed the dramatic rebound. Revenues at $152bn (€143bn) were up on the previous year and net income at $1.4bn (€1.32bn) compared to a $5bn (€4.7bn) loss in 2015. The higher commodity prices and asset sales saw debt plunge 40pc ($10bn, €9.4bn) to $15.5bn (€14.6bn). It also plans to reinstate dividends this year with a $1bn (€944m) payout planned. Its credit rating has been upgraded and Glencore now is in a much stronger financial position. With signs that the markets are improving and given Glencore's scale and its opportunities, the outlook is looking good.

While the company's shares have moved up, trading at 322p (€3.76), it is still not one for widows and orphans.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned

Irish Independent

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