Glencore Plans Bigger Debt Reduction as Commodity Prices Slide

Glencore Cuts More Debt, Sells Assets
  • Commodities trader to cut debt to $18-$19 billion by 2016
  • Blackrock questioned CEO on nickel mines during investor call

Glencore Plc pledged to cut debt even further, scale back operations and sell more assets, becoming the latest mining company that’s been forced to enact more aggressive measures to combat a worsening rout in commodities.

The company plans to reduce debt to as low as $18 billion by the end of 2016, according to a statement on Thursday. That’s lower than a September estimate and compares with a $30 billion debt load this year. It’s also studying an initial public offering of its agriculture business. The stock rallied 7 percent, the most since October.

“Glencore’s management was initially slow to respond to the more difficult environment, but is now aggressively and successfully repositioning the company to withstand a long-term period of low commodity prices,” Chris LaFemina, an analyst at Jefferies LLC, wrote in note. “A sustained recovery in the Glencore share price is dependent on a recovery in commodity prices.”

The world’s biggest mining companies are all restructuring their businesses and fighting declining profits as commodity prices keep falling. Companies that loaded up on debt during the decade-long commodities boom have been especially vulnerable. Earlier this week, Freeport-McMoRan Inc. halted dividends and Anglo American Plc is downsizing operations to stay afloat.

The shares rallied after Glencore said it will remain “comfortably” free-cash flow positive, even if commodity prices decline further. It has more than $2 billion of free cash flow at current levels.

“In the current price environment, the company will need to show continual delivery against this plan,” Liam Fitzpatrick, an analyst at Credit Suisse Group AG in London, who recommends buying the shares, wrote in a note. “But this update is better than expected, sufficiently detailed and provides a clear debt reduction pathway and timeline."

The company increased its asset-sales target to $3 billion to $4 billion, from a previous goal of $2 billion. The share sale of its agriculture division is one option as Glencore looks for deals to increase cash, Chief Financial Officer Steve Kalmin said on a call with investors.

It’s also seeking to complete another precious metals streaming deal this year and plans to sell two copper mines in the first half of next year. The measures add to actions already taken this year, including halting the dividend and raising $2.5 billion in a share sale. 

CEO Comments

“We retain a high degree of flexibility and will continue to review the need to act further as required," Chief Executive Officer Ivan Glasenberg, 58, said in the statement before a call with investors.

Glencore was questioned by its fourth-largest shareholder, with fund managers Evy Hambro and Olivia Markham of BlackRock Inc. asking about the viability of its nickel operations on today’s investor call. Nickel producers are “bleeding” cash at current prices, Glasenberg said, adding that the Murrin Murrin mine in Western Australia was being reviewed and may be closed.

Glencore closed at 88.9 pence in London. The stock has fallen 70 percent this year, the second-biggest decline in the U.K.’s FTSE 100 Index.

The company faces declining profit. It forecast earnings before interest, tax, depreciation and amortization of $7.7 billion next year. That compares with an estimate from Macquarie Group Ltd. of $9.3 billion and 2014’s Ebitda of $12.8 billion.

Glencore wants to increase its credit rating by one level to BBB+ at Standard & Poor’s. It also plans to reduce capital spending next year to $3.8 billion, from an earlier estimate of $5 billion.

The commodities trading division will deliver about $2.5 billion in earnings before interest and taxes this year, the lower end of a range announced in August. Glencore’s long-term target remains $2.7 billion to $3.7 billion.

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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