Glencore’s Reversal of Fortune Marked by Return to Dividends

  • Investors weren’t expecting a dividend reinstatement: Goldman
  • The stock tripled this year as coal and zinc prices rallied

Glencore: From Survival to Dividend

Last year, the commodities crisis was so bad that Glencore Plc had to ask investors for more cash. Now, in a sign of how quickly the tide has turned, it’s going to start paying them back.

Glencore plans to reinstate a $1 billion dividend in 2017 after skipping two payments as rebounding prices for zinc and coal bolster profits. The company also said earnings from its trading division this year will be at the upper end of its forecast range, thanks to “supportive market conditions” in the second half.

The resumption of dividends marks the culmination of a dramatic reversal of fortune for the world’s biggest commodities trader, which was forced to fend off comparisons to Lehman Brothers Holdings Inc. in 2015. Since then, billionaire Chief Executive Officer Ivan Glasenberg successfully engineered a recovery with a plan that included a $2.5 billion share sale, asset disposals, mine closures and cost cuts designed to reduce its $30 billion debt burden by almost half.

“The capital allocation plan is very sound,” David Herro, a portfolio manager at Chicago-based Harris Associates, which is Glencore’s fourth-biggest shareholder, said by e-mail. “The management team has executed a textbook turnaround.”

Dividends are coming back across the mining industry as producers emerge from austerity to reward shareholders. Brazil’s Vale SA, the world’s biggest iron ore exporter, this week said it would reinstate dividends next month.

BHP Billiton Ltd. and Rio Tinto Group, the two biggest miners, recently shifted to paying out a ratio of profits, meaning that higher commodity prices will lead to bigger returns for investors.

Shares Tripled

Glencore shares fell 1 percent to 276.50 pence by 2:41 p.m. in London. The stock has tripled this year, making it the second-best company in the FTSE 100 Index.

The dividend next year will total $1 billion, made in equal parts in the first and second half, according to a statement on Thursday. For 2018, the Baar, Switzerland-based company will pay $1 billion annually as well as at least 25 percent of free-cash flow from its industrial division. The company also announced an offer to buy back $1 billion of bonds maturing in 2019 and 2020. The offer closes Dec. 29.

“This is a positive development as we believe investors were not expecting a dividend reinstatement announcement with today’s presentation,” Eugene King, an analyst at Goldman Sachs Group Inc., said in a note to clients. The dividend equates to about 7 cents a share, he said.

Liberum Capital Ltd. estimates a total payout of about $1.7 billion in 2018, compared with $2.3 billion delivered to shareholders in 2014.

The dividends will be a boon for CEO Glasenberg, the second-largest shareholder. He stands to make $84 million next year and $143 million the year after, based on Liberum’s projections.

Glencore last month hit its target for asset sales this year of $4 billion to $5 billion. It plans to reduce net debt, which stood at about $30 billion last year, to between $16.5 billion and $17.5 billion by December.

Financial estimates from the statement include:

  • Earnings from the trading division will be at the high end of $2.5 billion to $2.7 billion in 2016
  • Free-cash flow of $6.5 billion in 2017
  • Earnings before interest, tax, depreciation and amortization of $14 billion in 2017
  • Trading earnings forecasts cut after sale of stake in agriculture unit

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

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