Glencore, Anglo Rally Loses Steam as Miners Deliver on Debt Cutsby
Shares have surged this year as miners sell assets, raise cash
Harris Associates has reduced its stake in Glencore to 6%
Glencore is barely changed in August and Anglo is up less than 4 percent after they more than doubled in the year through July. For Glencore, there are now fewer catalysts for gains as the Swiss company is closer to completing a $13 billion debt reduction plan, according to Macquarie Group Ltd. analyst Alon Olsha, who downgraded the stock to neutral last week because of the rally.
The world’s biggest mining companies have sold assets, scrapped dividends, reined in spending, and in Glencore’s case sold $2.5 billion of stock, to cut debt loads that panicked investors last year as raw-materials prices collapsed. On Wednesday, Glencore investors will get an update on its progress toward a net-debt target of as low as $17 billion by the end of the year as it announces first-half profits.
“Balance sheets are very much on the mend; it looks like the mining sector has turned a corner,” Olsha said in an interview with Bloomberg Television. “The big question is whether current commodity price levels are sustainable into the end of the year or whether excess capacity comes back and depresses prices again.”
One top-five Glencore shareholder has decided to lock in profits after the recent rally. David Herro, chief investment officer of Harris Associates LP, said in an interview with Bloomberg Radio on Monday that he’s reduced his holding from 8.5 percent to 6 percent. The rapid rise in the shares had forced him to “re-position” his holding, Herro said.
“The deleveraging trade from the first half of the year has played out and the question is what happens next,” Chris LaFemina, an analyst at Jefferies International Plc who has a hold rating on the stock, said by phone. “We’ve been waiting for a pullback to happen. Most of these shares are at or above our target prices so we don’t see a whole lot of value in this space.”
This year’s share price rally has also been aided by a rebound in prices for some commodities like zinc, up 43 percent, and thermal coal, by 34 percent. Baar, Switzerland-based Glencore is a dominant producer of both.
Still, the company will report a 64 percent slide in net income before significant items to $318 million, according to the average estimate of 16 analysts compiled by Vuma Consensus that was posted to the mining company’s website.
Its three major London-listed peers BHP Billiton Ltd., Rio Tinto Group and Anglo American have already delivered numbers reflecting the dire state of commodity markets, with BHP reporting its worst profit ever and Rio its poorest earnings since 2004.
Glencore’s trading business, which has offset a slump in profit from its mining unit, will report earnings before interest and tax of $1.19 billion for the half-year, according to the estimates. When annualized that’s below the bottom end of Glencore’s forecast range for the year of $2.4 billion to $2.7 billion.
“It’s possible that the marketing business outperforms,” LaFemina said. “Even though there are some headwinds in trading still, things are improving.”
Investors will also be looking for a significant reduction in the company’s $25.9 billion debt load after it sold almost 50 percent of its agriculture business for just over $3.1 billion earlier this year. The company has said it’s aiming to reduce net debt to as low as $17 billion by the end of the year.
“They are in the middle of their planned deleveraging and there is more to go and I think they will deliver that,” LaFemina said. “I don’t believe that they are complacent yet, even though many in the market have become complacent about mining equities.”
Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.