As the ink dries on a near $900m deal for Glencore to sell its Australian coal-haulage business, the billionaire chief executive of the mining and commodity house, Ivan Glasenberg, has emerged as the unlikely face of the industry’s austerity drive.
With the disposal of its coal-by-rail GRail business, Mr Glasenberg has achieved his target of $4bn-$5bn of asset sales in 2016. Additional cash saving measures, from suspending dividends to selling stock, and commodity price rises could see the miner-cum-commodity trader end the year with net debt of $15bn, down from $25.9bn in December.
That marks a stark shift from a year ago when the company was targeted by short selling hedge funds, which saw betting against its highly leveraged balance sheet as the easiest way to make money from the deepest and longest commodity crash for a generation.
They should have known they were picking a difficult fight. Mr Glasenberg has long been known as a fierce competitor and dealmaker. After a 230 per cent rally in Glencore’s share price since January, the big question now is whether Mr Glasenberg and his close-knit cadre of senior executives will continue to embrace a philosophy at odds with their dealmaking DNA.
One banker, who has advised the company, says its next step “is likely to be a balance between selling a few things — although they don’t have to — and selectively positioning themselves around some interesting situations.”
After GRail, Mr Glasenberg is no longer under pressure to divest assets that have been on the block — such as a gold mine in Kazakhstan reported to be worth $2bn and a copper mine in Australia.
If prices hold, Glencore should generate enough cash to further improve its ratio of net debt to earnings, even if it resumes dividend payments at the end of its current fiscal year. That could help the company achieve a higher credit rating — it is rated one notch above junk.
Annualised free cash flow in August was more than $4.5bn and commodity prices have rallied further since then.
But much depends on the outlook for commodity markets — and therefore supply and demand in China, the world’s biggest consumer of raw materials — which remains highly uncertain.
While prices for most commodities have rebounded this year, analysts are far from certain the upswing will be sustained. That is arguably the biggest challenge facing Glencore and its peers, they say.
This year has been notable for the striking impact policymakers in Beijing have had on commodity prices. Stimulus measures and supply curbs dramatically changed the outlook for base and bulk commodities, surprising many in the industry.
“The extreme volatility seen in many commodities this year, most notably in coal, has made long-term planning even more difficult for mining companies,” says Hunter Hillcoat, an analyst at Investec Securities.
Thermal coal has more than doubled to $100 a tonne after China cut the number of working days at its domestic coal mines, a move that forced power plants to source more material from overseas.
As the world’s largest producer of seaborne thermal coal, Glencore should have been a big beneficiary of the price surge, but a decision taken this year to hedge, or sell forward, half of its annual exports volumes — about 55 tonnes of coal — has limited the company’s exposure to rising prices.
Unlike many of its rivals, Glencore still sees coal as a fundamentally attractive commodity, taking the view that supply will becoming increasingly constrained as investors grow more wary of financing new mines, while the need for cheap power in the developing world underpins demand.
Glencore has been mentioned as a possible buyer or partner for Rio Tinto’s thermal coal assets in the Hunter Valley, Australia’s leading coal export region.
“Selectively, they will start to look at M&A opportunities,” says another banker. “If they were to do a deal where they put $500m of capital people will be comfortable.”
Another decision for Mr Glasenberg and his team is when to bring back mothballed zinc and copper capacity. A year ago Glencore announced the temporary closure of 500,000 tonnes of zinc production. It also suspended production at two copper mines in the Democratic Republic of Congo and Zambia during modernisation works.
Zinc, used to galvanise steel, has risen more than 40 per cent this year to $2,263 a tonne, in part because of Glencore’s production cuts. But copper — at $4,650 a tonne — is close to where it started the year, much to the frustration of senior executives at the company.
Glencore is among the world’s biggest copper producers. If the price of copper starts to rise, Glencore could reap the benefits, say analysts. But if it does not, its shares could struggle to make further progress as investors lock in profits after this year’s stellar run.
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