Glencore's Trading `Black Box' Leaves Analysts Split on Future

What’s Behind Glencore’s Freefall?
  • Slide leaves even analysts with sell rating predicting rally
  • No other Stoxx 600 stock has such a wide gap in price targets

Glencore Plc, the commodity trader that lost about a third of its value Monday, is worth either $98 billion or $26 billion, depending on which analyst you ask.

At Sanford C. Bernstein, price targets published by Paul Gait suggest the Baar, Switzerland-based resource company can rally sevenfold to 450 pence, the top end of predictions tracked by Bloomberg. At the bottom, Nomura Holdings Inc.’s 120-pence forecast implies a market value that is $72 billion lower.

The dispersion shows the difficulty in valuing a company caught between China’s slowing economy and mounting concerns about its debt load. In addition to diverging views on copper prices, questions about how to evaluate Glencore’s trading business, unique among big mining companies, are muddling the equation, according to Clarksons Platou Securities’ Jeremy Sussman.

“Glencore does have a unique trading business that is different from their competitors, and it’s a much more difficult business to model than a straight ‘you mine it, you sell it, and take whatever margin’ one,” said Sussman, an analyst for Clarksons Platou in New York. He recommends holding the stock, which he estimates will rise to 190 pence. Analysts “with targets in the higher end are probably in the camp that think trading will return to levels where it had been in the past couple of years.”

The mean analyst price estimate has soared to a record versus the stock price.
The mean analyst price estimate has soared to a record versus the stock price.

Glencore tumbled 29 percent yesterday, the biggest slide since its $10 billion initial public offering in 2011, after Investec Plc warned there would be little value for shareholders if low raw-material prices persist. With a closing stock price of 68.6 pence, below the most bearish estimate, at least two of the three analysts with a sell rating have a forecast that implies a rally. Of the remaining, 17 have a buy rating or similar, and 12 recommend holding the shares.

Bernstein’s Gait, who has the most bullish stock-price projection out of the analysts tracked by Bloomberg, says that while the trading division remains “somewhat of a ‘black box,’” it still generates earnings, he wrote in a note last week. The stock has fallen so much that it now reflects the risk of bankruptcy, according to Gait. He says the slump is overdone and recommends buying the shares.

The stock jumped 17 percent in London trading.

It’s unclear what portion of the trading business’ earnings comes from arbitrage -- where Glencore buys a commodity in one region and sells it in another to capture the profits -- versus directional bets, where the company buys raw materials and takes on price risk, according to David Wang, a Chicago-based analyst with Morningstar Investment Services Inc.

Marketing Segment

“It’s fair to say the marketing segment is a black box,” Wang said, referring to the trading unit. “They disclose the volumes they transact but not what sort of bets they’ve been making. There could be so many bets that it’s difficult to distill down to a couple of data points. That being said, there hasn’t been much transparency regarding it.”

In the first half of 2015, adjusted earnings before interest and taxes from the trading business was $1.07 billion, about three-quarters of Glencore’s total profit and falling short of the average analyst projection. The company slashed last month its forecast for full-year Ebit from the unit to no more than $2.6 billion from as much as $3.7 billion.

Glencore shares trade at a valuation that’s about a third that of miners in the Stoxx Europe 600 Index. In the three years before 2015, its price relative to earnings before interest, taxes, depreciation and amortization was more than 55 percent higher.

At 330 pence, the difference between the highest and lowest analyst estimate is almost five times Glencore’s share price. That compares with an average of 52 percent for other members of the Stoxx 600. Tullow Oil Plc, Seadrill Ltd. and miner Anglo American Plc have the next widest spreads in price targets. A Glencore spokesman declined to comment for this story.

“What should we be paying for that trading business?” said Patrick Jones, an analyst at Nomura in London. “That’s the big question. I don’t think we should be paying any more than what its parts are. It should be a discount because there’s very little synergy between” the trading and mining businesses, he 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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