Glencore’s Worst Profit Shows Miners Still Reeling From Rout

Glencore Wants to Cut Debt to as Low as $16.5 Billion
  • ‘It’s still trying to get balance sheets in order:’ Macquarie
  • Company plans to trim net debt to as low as $16.5 billion

Glencore Plc’s lowest profit in its five-year history as a public company shows that for all its success in soothing investor concerns about a debt-heavy balance sheet, it’s still a long road to recovery.

Weak raw-material prices caused profit at the commodities giant to plunge 66 percent in the first half to $300 million. The shares dropped 3.1 percent in London even as Glencore promised to cut debt even further and said it may resume paying dividends next year.

The company, the world’s biggest coal exporter, also recorded a $395 million loss after hedging future coal production prior to a price rally.

The results from Glencore reflect the dire state of the mining industry -- BHP Billiton Ltd. also suffered its lowest profit yet and Rio Tinto Group’s were the poorest in more than a decade. Last year’s collapse in commodities forced Glencore to roll out a rescue strategy that included scrapping its dividend, selling $2.5 billion of stock, disposing of assets and slashing spending.

“We are optimistic on Glencore’s commodity exposure, but we still see challenges ahead for the company,” Chris Lafemina, a mining analyst at Jefferies International, said in a note. “Poorly timed coal hedges have ironically limited Glencore’s leverage to the ongoing recovery in coal prices.”

The company widened its debt-reduction target by $500 million and plans to trim net borrowings to as low as $16.5 billion by year-end. The commodity slump means Glencore now generates most of its cash from trading as its mines and smelters around the world struggle to make a profit.

Glencore closed at 184 pence in London, valuing the company at $35 billion.

The shares have doubled this year as Chief Executive Officer Ivan Glasenberg checked off targets on the plan to cut borrowings almost in half. It made further progress today by announcing a $670 million deal to sell future output from an Australian gold and copper mine.

“The mining sector is still in divestment mode, it’s still trying to get balance sheets in order,” Colin Hamilton, an analyst with Macquarie Group Ltd. in London, said in an interview Wednesday with Bloomberg Television. “They are doing much more work to repair their balance sheet, I would say, than many of their peers.”

The board will make a decision whether to resume paying dividends ahead of results in March, Chief Financial Officer Steve Kalmin said on a conference call. Glencore, based in Baar, Switzerland, paid 6 cents a share in August 2015.

At the trading business, adjusted first-half earnings before interest and tax was $1.22 billion. The company forecast full-year adjusted EBIT from the division at $2.4 billion to $2.7 billion this year.

Miners have benefited from a rebound following production cuts. BHP CEO Andrew Mackenzie said last week that it’s possible the freefall in commodity prices may be over.

“After a difficult start to the year, the more constructive tone of markets in recent months has helped support the pricing of many of our key commodities,” Glasenberg said in the statement. “While we are highly cash-generative at current spot prices, we remain mindful that underlying markets continue to be volatile.”

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

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