Glencore Weighing 2015 Share Buyback Versus Other Options

Glencore Plc, the mining company that proposed a merger with Rio Tinto Group this year, is weighing whether to continue buying back its shares in 2015 against other potential opportunities including acquisitions.

“We are in as good a position as any to look at what we do in terms of continuation of buyback programs come 2015,” Chief Financial Officer Steven Kalmin told analysts and investors today at a presentation in London. “But you are going to throw into the mix of course what we may do in some other opportunities that come up.”

Rio Tinto rebuffed an approach in July from smaller rival Glencore to create the world’s biggest mining company with a combined market value of about $150 billion by merging the two companies. Glencore said in October it wasn’t considering an offer for Rio, effectively barring it from bidding for six months under U.K. takeover rules.

A recent slump in oil and iron ore prices provides potential M&A opportunities from distressed sellers, Chief Executive Officer Chief Executive Officer Ivan Glasenberg said. There’s a good chance oil prices could be lower at the start of next year, Alex Beard, head of Glencore’s oil unit, said today.

“Acquisitions could look interesting,” Glasenberg said on a later call with reporters. “Companies’ values have gone down so of course, opportuntistically, like we’ve always said on any commodity, we will be looking at opportunities. Now if we believe things are priced at discounts to what we believe they’re worth, we’ll look at them.”

Buyback Decision

Glencore said it’s retaining its focus on returning excess cash to investors amid declining prices for its two of its key sources of profit, coal and copper. A $1 billion share buyback announced in August is 65 percent complete and a decision on continuing to buy back shares will be made around next March when the current program ends, Kalmin said.

“We are not going to hoard cash for the sake of hoarding cash or we’re not going to buy something for the sake of having a bigger company,” Glasenberg said. “We’re going to do what is best to do with that cash. If we can’t deploy it in our business at a return that makes sense, we will give it back to shareholders.”

Investors have demanded greater returns from mining companies following a decade-long $1 trillion investment spree marred by failed acquisitions and overspending on mine expansions that flooded metals markets. After a decade of price gains fueled by Chinese demand, often defined as the commodities supercycle, miners have been contending with slower growth by shunning mergers, reducing spending and cutting costs.

‘Cash Machine’

Rio is a “cash machine” under any price scenario, Chief Executive Officer Sam Walsh said in an interview last week. Rio is the second-largest exporter of steelmaking iron ore.

Glencore is also studying the sale of three nickel assets including the Cosmos nickel operation in Australia, which was acquired in 2007 for A$3.1 billion ($2.6 billion), it said today.

“Capital misallocation, not a lack of demand, remains a key issue for the sector,” Glasenberg said today in a statement. “We will continue our disciplined approach to capital allocation, based on the supply-demand fundamentals.”

Prices for iron ore and coal are trading near five-year lows amid a worldwide glut of both materials while copper has dropped about 12 percent this year. The price of brent crude oil fell to less than $65 a barrel today for the first time in more than five years.

China Demand

The supercycle isn’t dead as Chinese demand is stronger than ever, Glasenberg said in an August interview. Rather, the price slump has been caused by over-investment in new mines, he said. The company expects to spend about $4 billion a year on its projects through to 2017 when spending will drop to about $3.5 billion, it said today.

Glencore is halting production at its Australian coal mines for three weeks this month as prices for the power-station fuel languish at a five-year low. That will rein in about 5 million metric tons of output, or about 6 percent of Glencore’s Australian coal production last year.

In the iron-ore industry, Glasenberg has argued that his two biggest rivals have got it wrong by feeding a global glut. BHP Billiton Ltd. is the world’s largest mining company.

“Our ability to acknowledge and react accordingly to the supply-demand fundamentals across our markets has played a key role in enabling us to continue to deliver on our main objectives; the efficient deployment of capital to grow earnings, cashflow and dividend per share,” Glasenberg said.

Glencore shares fell as much as 1.8 percent to 306.35 pence and traded at 307 pence at 4:25 p.m. in London, giving the company a market value of about 40.4 billion pounds ($63.5 billion).

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