Shares in Glencore (GLEN) went into freefall earlier this week following the release of an Investec analyst note highlighting the dangers posed to shareholder value by the group's unwieldy debt burden and its slender margin profile. It may seem slightly surprising that a FTSE 100 constituent is seemingly lurching towards an existential crisis on the back of a debt critique, but the IC identified the central underlying problem when Glencore commenced trading on the London Stock Exchange midway through 2011: namely, that the debut probably marked the high water mark of the commodities boom. The group's share price has been under water ever since.
The recently announced debt-reduction package - including a controversial $2.5bn (£1.6bn) cash call - obviously did little to allay investor anxieties. Instead, a number of institutional investors are up in arms about the decision to raise equity through a placing; effectively ignoring a commitment to give existing shareholders the right of refusal to participate. Regardless of any disputes over pre-emption rights, the ability of management to corral the group's skyrocketing debt will be undermined if, as the Investec analysis suggests, the downturn in commodity pricing is far from played out. Indeed, the analysis raises the spectre of a collapse in shareholder value if management becomes unduly fixated on debt retrenchment at the expense of earnings growth.
The scenario painted by Investec was subsequently brought into question by analysts at Citigroup, Glencore's corporate broker, which resulted in a minor rally in the group's shares, although they're still 74 per cent adrift of their level from just six months ago (even without direct exposure, anyone holding a UK pension has suffered due to the negative impact on benchmark tracker funds).The Citi analysts also recommended that the group should consider going private again to restructure its business if it can't regain the faith of investors, although this option might not be welcomed by all minority holders.
Some industry watchers have ventured that this week's sell-off may eventually come to be seen as a "Lehman's moment" for the wider commodities complex. That might sound slightly alarmist, but there are real dangers posed by the magnitude of Glencore's leverage and the threat of contagion through the group's numerous counterparty transactions. What's more, Glencore is by no means alone among the major diversified miners in being heavily indebted - Investec also highlighted Anglo American (AAL) as being in a particularly perilous position.
