Glencore Discovers Humility

Prudence, not bravado, is the right approach.

Humility is so much more becoming than arrogance. Glencore Plc's plan to reinstate its dividend next year with a modest $1 billion distribution to shareholders shows a maturity that the swaggering commodity trader once lacked.

The supposed smartest guys in the trading room had to be dragged kicking and screaming into a debt-reduction plan last year when short-sellers threatened to bring the company to its knees. But Glencore's Damascene debt-cutting conversion last September under CEO Ivan Glasenberg seems to have done the trick.

Thanks to a dividend suspension, cost cuts and chunky asset sales, net debt is on track to fall to as little as $16.5 billion by year end, or less than two times Ebitda.

With Glencore targeting about $6.5 billion of free cash flow in 2017, well ahead of the consensus forecast, there must plenty of long-suffering investors who'd have liked a bigger payout for their troubles. The dividend proposal equates to a 2 percent yield, less than what you'd get for 10-year U.S. government debt.  

Glencore's shares have trebled this year. Once again, it has a price-to-book ratio above one, showing investors are more confident that Glasenberg's team won't destroy value.

Mining for Value

Glencore's price-to-book ratio has rebounded above one

Source: Bloomberg

Still, anyone who bought the shares in 2011 -- when Glencore's IPO made its bosses billionaires -- is sitting on an almost 50 percent paper loss.

Digging Deep

Glencore's stock has rebounded this year but it's still well below the IPO price

Source: Bloomberg

The dividend addicts have short memories, though. True, coal, zinc and copper prices have rebounded dramatically, which bodes well for cash flow. Yet those price moves reflect in part a combination of government intervention (China shuttered coal mines, triggering a supply shortage) and feverish financial speculation rather than a sustained improvement in global demand.

In the good times, Glencore's huge leverage juiced its returns. But with a Donald Trump presidency poised to consign international diplomatic norms to the scrapheap and asset bubbles popping up in China like desert flowers after a rainstorm, now doesn't seem like the moment for Glasenberg to re-gear the balance sheet.

From 2018, Glencore plans to pay out an additional 25 percent of industrial free cash flow on top of the $1 billion fixed payout.

Regardless, shareholders would be wise not to count on that extra money just yet. As the stock's roller-coaster ride shows, a lot can happen in commodities in a year. For now, prudence, not bravado, remains the right approach.

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

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Chris Bryant in Frankfurt at cbryant32@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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