Commodities

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

When a CEO says there's room for a $20 billion dividend payout, you know a company has its mojo back.

Ivan Glasenberg, the boss of miner and trader Glencore, told analysts on Thursday that the company’s much lower net debt ($15.5 billion at the year end, $10 billion lower than the prior year and on track to fall further) would, in theory, allow for a huge windfall.

As usual, Glasenberg was being provocative. Shareholders aren't about to drown in Glencore cash. Yet his remarks show confidence is flowing back through the Swiss-based commodity house. “What a difference a year makes”, he said at the start of his presentation. Not half.

Tighter Ship
Glencore's net debt is less than half what it was
Source: Glencore
The 2017 figure is an estimate based on current commodity prices. It would be higher if Glencore spends more on M&A or dividends.

Eighteen months ago, Glencore had to raise capital when short-sellers scented a kill amid cratering commodity prices and fears that China's economy would implode. It has since disposed of about $6 billion of assets and cut operating costs and capex. Meanwhile, commodity prices have rebounded, to put it mildy. Take cobalt, an ingredient of lithium-ion batteries for electric cars. Glencore controls a big chunk of the market and this chart shows what cobalt prices have done recently:  

Electric Shock
Cobalt prices are booming thanks partly to e-car battery demand. Glencore is a beneficiary
Source: Metal Bulletin

Commodity prices aren't set in stone, of course. But should things stay as they are, Glencore would generate about $15 billion of Ebitda in 2017 and roughly $7 billion in free cash flow. With around $1 billion set aside for dividends in 2017, net debt would fall to about $9 billion by the end of the year and leave the balance sheet looking rather tame. The guidance implies net debt of just 0.6 times Ebitda by the end of 2017, versus 1.5 times at the end of 2016. Glencore promises that net debt will not exceed two times Ebitda.

So Glencore's problem, if you can call it that, is what to do with all that extra cash. It still has mothballed reserves and doesn't need to spend vast amounts on capex. This will stay at close to $4 billion for the next three to five years, a relief given the industry's reputation for frittering away money. While Glencore will want to keep credit rating agencies sweet and powder dry for sensible M&A, it can afford to be a bit kinder to shareholders. After all, they've had a heart-stopping time of it.

Glencore's 2017 dividend pledge equates to a pretty miserly 2 percent yield (there's more on offer from 2018). A special dividend as reward for shareholders' sleepless nights in late 2015 doesn't feel too imprudent. With Glencore executives holding a lot of stock -- Glasenberg has an 8 percent share -- the management aren't likely to put up much resistance. Plus returning cash would temper any urge to start spending too freely or chase risky deals.

Chutzpah is one thing, but carelessness quite another.

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

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

  1. Glasenberg favors dividends over share buybacks, which seems right -- let shareholders decide if the stock is undervalued or not. 

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