Photographer: Valerian Mazataud/Bloomberg

Glencore's Bleak Year Gives Way to CEO's Unfailing Optimism

  • 2015 was a tumultuous year for everyone in the industry: CEO
  • Miner outlines more agressive debt reduction, asset sales

For a company that just reported its worst profit since going public five years ago, Glencore Plc’s top executives sounded almost cheerful.

Glencore’s characteristically upbeat management told reporters on Tuesday they see commodity prices bottoming, a potential return to dividends in 2017 and China’s copper orders coming off their best year yet. The comments paint a rosier picture for the industry than its mining peers and come a year after Glencore confronted investor fears over its debt burden and earned the recognition of being the second-worst performer in the U.K.’s FTSE 100 Index.

Ivan Glasenberg

Photographer: Simon Dawson/Bloomberg

“It’s been a tumultuous year for anyone in the commodity business, not just us,” Chief Executive Officer Ivan Glasenberg said. “I’ve been in this business a long time. You have these years.”

There are reasons behind the optimism. Glencore shares have rallied 46 percent this year and Harris Associates LP’s David Herro called the company well managed in an interview on Bloomberg Television. Still, there’s a long road ahead. There aren’t any signs of any imminent recovery in commodities, and low prices plus weak Chinese demand slashed the company’s profit by 69 percent in 2015.

Glencore has already scrapped the dividend, cut spending, closed mines and sold $2.5 billion of shares. The turmoil prompted it to get even more aggressive. The company pledged to bring its net debt as low as $17 billion, $1 billion less than previously stated, and raise as much as $5 billion from selling assets.

“This is what we want them to keep focused on in the short term,” said Herro, who now holds an 8.5 percent stake in the company. “Once you are at a comfortable leverage position, then we can look at other ways of dispersing that free cash flow.”

It’s possible dividend payments could resume next year if Glencore reaches its debt targets and commodity prices haven’t deteriorated too far, Chief Financial Officer Steve Kalmin said Tuesday. A decision will be made in about 12 months after talking to investors, he said.

Even as mines bleed cash, Glencore is getting steady profit from its trading division -- setting the company apart from peers such as BHP Billiton Ltd. and Rio Tinto Group that are more closely tied to the price of iron ore. 

Don’t Gamble

“It’s relatively low risk. They don’t gamble on commodity prices. They are a facilitator of the movement of key commodities,” Herro said. “It’s an annuity-like income stream and whenever we see that with high barriers, that’s a really good thing. It’s almost an unassailable position.”

Trading generated adjusted earnings before interest and tax of $2.46 billion and the company expects it to be stable next year. By comparison, the mining division lost almost $300 million.

“Some of the market panic seen in the fourth quarter of last year was caused by fears that the trading business would collapse with lower commodity prices,” Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London who recommends buying the shares, wrote in a report on Tuesday. “Today’s results show how misguided this theory was.”

The stock advanced 1.1 percent to 131.9 pence at 9:34 a.m. in London on Wednesday, valuing the company at about $26 billion.

To be sure, Glencore shares are still 75 percent below the price from its 2011 initial public offering and metals are coming off the worst year since the global financial crisis of 2008. Even for a 30-year veteran of the commodities world, lessons have been learned.

“We have taken note that the balance sheet has to be structured, operating in public markets, in a manner that makes shareholders relaxed,” Glasenberg said. “Lesson learned? Yes, have the balance sheet in much stronger check, ready for far lower commodity prices than even we may envisage will occur.”

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

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