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First the rout, now the repair - Glencore eyes sales and lower debt

The commodities giant had a terrible 2015. Now Glencore is doing all it can to emerge from the bottom of the market.
March 2, 2016

"Have we bottomed? I think so," said Ivan Glasenberg, responding to a journalist's question during Glencore 's (GLEN) full-year results call. Even if that estimate of the parlous state of the commodities market is ultimately vindicated, the mining giant's chief executive will be hoping that the rebound is sharp and imminent. That's because, on current evidence, Glencore is not yet on the road to salvation.

IC TIP: Hold at 135p

The scale of the challenge was underlined by last year's performance in the industrial division, where low pricing crushed margins and forced the curtailing of copper and zinc production. Consequently, a return to growth this year will be extremely hard. Capital expenditure for 2016 has been cut by a further $300m (£215m) to $3.5bn, while current spot prices are unlikely to generate much more than $3bn in free cash flow.

Glencore's trading arm - whose somewhat opaque activities we've long struggled with - could be one source of resilience, however. The division is less correlated to the absolute prices of the commodities it sources, ships and trades, though operating earnings still fell 46 per cent to $461m in the metals and minerals division due to a collapse in aluminium premiums. Elsewhere, a strong performance in oilseed, cotton and sugar trading was offset by the impact of Russian wheat export taxes and a less volatile Canadian harvest.

However, the agricultural business could provide another source of cash, if Glencore soon sells a minority stake in the division. This, alongside the disposal of assets, including the Lomas Bayas and Cobar mines, should help to raise a further $5bn before the half-year and thereby reduce the enormous debt pile.

That would be useful, as concern over the Glencore's highly-leveraged balance sheet was the key factor in the stock's precipitous decline since the summer. By December, the headline net debt figure had reduced from $30.5bn to $25.9bn, though the smaller pool of equity meant Glencore's leverage increased.

Prior to these results, Canaccord was forecasting cash profits of $8.02bn and adjusted EPS of 2¢ this year, against $8.66bn and 8¢ in 2015.

 

GLENCORE (GLEN)

ORD PRICE:135pMARKET VALUE:£19.4bn
TOUCH:135-135.25p12-MONTH HIGH:308pLOW: 66.7p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:287¢NET DEBT:63%

Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
20111864.0072.015.00
20122141.1014.015.75
2013233-7.70-73.016.50
20142214.2518.018.00
2015170-8.02-37.0nil
% change-23---

Ex-div: na

Payment: na

£1=$1.40