Why Copper Is Glencore’s Biggest Challenge

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Aug. 20 (Bloomberg) –- Sanford C. Bernstein Senior Research Analyst Paul Gait discusses the mining sector, the challenges facing the industry and the outlook for the rest of the year with Mark Barton and Manus Cranny on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

Joins us now.

-- paul gate joins us now.

You have a checklist.

Let's see what you say starting with the african copper assets.

African copper is one of the aspects that differentiates glencore from a asset perspective.

They are one of the few large cap diversified miners that is in zambia.

What we have seen is old world copper in latin america.

The costs and grades have started to move against the major mining company.

Glencore is unique and central africa.

People look to that as the mainstay that differentiates them from the likes of rio tinto.

A big part of it is business.

One of the underperforming commodities this year.

How is that going to look for earnings?

That is going to have a negative drag on earnings.

That is the second-largest contributor behind copper to the revenue of the mining, the industrial assets in glencore.

We have seen coal price, under pressure.

Not just this year, but the last couple of years.

The market will be looking at those numbers.

How much cost has glencore been able to strip out of the coal business, particularly those assets they inherited in the merger and see whether that cost deflation is offsetting the cost declines that we have seen to allow the business to be due to contributing -- to be able to contribute to the earnings.

I think people will pay attention to it.

They had a meeting to reward shareholders.

What do you reckon he will give the shareholders?

This is the differentiating factor between him and dhp?

We saw las bambas.

$6.5 billion, all in.

That is the price they managed to get for that.

Bhp yesterday, we saw the share price come under pressure.

Investors were looking for a return of capital, validation of the historic investment the company had made.

One way of demonstrating that is returns of capital.

Bhp has passed on the mantle.

It has been passed to glencore.

Will we see going core step up and deliver some of that $6.5 billion back to shareholders?

I think they will want to get a balance sheet a bit, but the numbers could be a few billion dollars.

I think people will be looking at that with significant interest.

One of the comments made -- i want your insight.

You know these people.

He said, what sets us apart, what sets glencore apart is that they are not the parent on iron.

88% of rio tinto comes from iron.

Should we be betting on that differentiation factor?

He has coal under pressure, iron ore is under pressure.

Is that a good differentiation?

I think it is.

He is the only one of the major diversified that does not have a iron as the mainstay of his commodity.

With glencore, you have the full set of base metal exposure.

Copper, nickel, zinc.

Nickel and zinc have performed well this year.

That will offset some of the pressure.

-has been vocal -- ivan has been vocal about the pressure putting on the iron ore price due to the oversupply from the majors.

They keep producing it, don't they?

That is a strategy that has worked so far.

Volume gains as offset price declines.

It is a strategy that only has a rigid way to run.

If the demand is not pick up in china, you question how far there is to push the price down before even the likes of rio tinto -- bhp with a low cost of operations -- really start seeing the impact of that.

It is a differentiation for glencore.

I think it will continue to be so going forward -- forward.

They announced that the spin off of their division will be valued at 6.5 billion.

Aluminum, coal.

Will this be attractive to investors?

Does it provide long-term value for shareholders?

I am somewhat skeptical.

Shareholders are going to get the same set of assets in a different package.

Before you had exposure to these assets, you still have exposure.

What changes?

What is the incremental source of value creation from spending off this business unit?

I struggle to see the case for a. of -- for it.

And if you talk about people looking for exposure, you can always find a way to play any commodity the way you would like without having to take owne rship of this country.

If you are looking for zinc exposure, there are better places to play.

If you are looking out for aluminum exposure, why not buy a company?

It is difficult to me to see why this asset would attract a premium rating.

If you look at the history of it in the portfolio, its return on capital is lower than the rest of the portfolio.

It is difficult for me to justify a premium rating.

What about your assessment of commodities in general?

The s&p gsci.

The gauge of commodity is down 5% in 2014. 30% below its oap.

What is the outcome?

This defines the bulls and the bears.

Where are we in the cycle?

Is this a cyclical downturn on the back of poor capital discipline from the mining investment and is it the supply side that has driven prices down or is it the end of a super cycle demand phenomenon, in which case we can see the prices continued to drift down?

I'm somewhat more constructive on average.

We have been more bullish, particularly for commodities like copper where we see real geological constraints on the supply side.

Over the next few years, we will see what the impact of those constraints will be on the ability of the industry to continue satisfying demand without an uptick in price.

If you have to make the choice between ivan and farney, where is the next big move?

Everything that i am reading is on a bullish sentiment that we will get a wash of cash in terms of buyback.

I think we will have to wait a while.

All numbers -- all eyes are on glencore to see the wall of cash.

I think rio tinto is the next best place to see it.

They have been talking strongly in their results.

I think we will see that in february of next year when we see the impact of those declines.

Ivan glaze and berg has claimed the modest mantle in the room in the mining industry.

I think people look to him for guidance for what the future holds for is he the smartest man in the room?

I think he has the plan to be that.

Wise words from paul gate.

We will get a new ticker for it,

This text has been automatically generated. It may not be 100% accurate.

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