Glencore's platinum promise

Glencore (GLEN) has revealed that it will unload its 23.9 per cent stake in Lonmin (LMI). This will be achieved by way of an "in specie" distribution to shareholders, proportionate to their holdings in the Switzerland-based commodities giant. The stake is seen by management as excess baggage, a residual element of 2013's 'merger of equals' with Xstrata (Xstrata had secured the Lonmin stake five years earlier as part of an aborted takeover attempt). Glencore doesn't trade in platinum group metals (PGM), so the move is hardly surprising, particularly when you consider the PGM market remained stagnant even after last year's prolonged industrial strife in South Africa.

The group also delivered a production report, which was essentially a mixed bag, with a number of declines across its metals complex offset by encouraging news on copper, palladium, ferrochrome, nickel and cobalt. Gold production came in at 267,000 ounces (oz) for the fourth quarter, more or less static from a year ago, while full-year output was down 6 per cent to 955,000 oz. Own-sourced coal production was 146m tonnes, up 6 per cent over 2013. Glencore said that its marketing activities were in line with expectations, but confirmed that it was cutting spending by around $1.4bn in response to continued weakness in key markets.

JPMorgan Cazenove says…

Underweight. The intended disposal of the 24 per cent Lonmin stake in the first half of 2015 has only very modest positive value implications and highlights the lack of trade buyers. It does, however, remove a strategic headache. The stake is currently worth $367m, equivalent to 1.8p a share or 0.7 per cent of Glencore's market capital, and so is negligible in the context of the group's valuation. Cutting full-year capital expenditure guidance from $7.9bn to $6.5bn-$6.8bn demonstrates flexibility, but also highlights the constraints management faces in a lower commodity price environment.

HSBC says…

Overweight. In a lower commodity price environment the marketing business releases working capital, which buffers the balance sheet. We have updated our estimates following our revised commodity price assumptions. On our new numbers, Glencore is trading on attractive 8.1 and 5.2 price-earnings (PE) multiples for 2015-16. Under a bear-case scenario, which incorporates prices close to current spot prices, these PE ratios expand to 15 and 11.8. Our sum-of-the-parts discounted cash flow analysis gives a net asset value of 264p a share. We reiterate our overweight rating and cut our target price from 440p to 395p.