• Bernstein says stock plunge this year has been overdone
  • Commodities have to fall 34% for stock to be worthless: Gait

Glencore Plc shares have fallen so low that valuations are divorced from underlying commodity markets, according to Sanford C. Bernstein & Co.

Paul Gait, an analyst for Bernstein in London, recommended buying the stock, saying Glencore’s 79 percent plunge this year has been excessive relative to the decline in commodity prices. The valuation is now reflecting the risk of bankruptcy, he said. The shares rose for the first time in five days, gaining as much as 5.1 percent in London.

“The company’s trading business has come under intense scrutiny from investors, and concerns have mounted about the company’s financial position,” Gait wrote in a note Wednesday.

In the first half, “the much vaunted earnings stability of the trading business was seemingly broken. Despite this, we see the recent valuation movement as overdone,” he said. “The fears of bankruptcy therefore appear, to us at least, to be overdone.”

Charles Watenphul, a spokesman for Glencore, declined to comment.

Shares Rebound

Gait estimates the shares will rally to 450 pence in the next 12 months. The stock added 4.3 percent to 110.90 pence as of 4:11 p.m. in London.

On Tuesday, shares of the trading and mining company headed by billionaire Ivan Glasenberg dropped below 100 pence for the first time since a $10 billion initial public offering in 2011. The company has scrapped its dividend, sold $2.5 billion in new shares and is working to implement a debt-reduction plan to protect its credit rating.

A basket of commodities would have to fall another 34 percent for Glencore shares to be worth nothing, Bernstein said. That would imply copper below $3,500 a metric ton, Gait said, compared with $5,110 now. For zinc, prices would be less than $1,100 a ton. The metal trades at $1,673.

Black Box

“Glencore’s assets are of significantly higher quality than those of many other producers,” Gait said. “While Glencore’s trading business remains somewhat of a ‘black box,’ the fact still stands that it continues to generate a significant stream of earnings.”

Analysts at Investec Ltd. were more cautious. Unless commodity prices recover, the company’s recent steps to bolster its balance sheet and reduce debt may not be much benefit to shareholders, Marc Elliott, an analyst at Investec, said in a note e-mailed Wednesday.

The brokerage raised its rating on Glencore to "hold" from "sell" and reduced its share-price estimate to 125 pence from 133 pence.

“Shareholder returns may well be minimal,” Elliott said.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

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