Higher Copper Prices Could Put Floor Underneath Glencore Stock
This morning, mining giant Glencore plc (OTC:GLCNF) had another of its typical stunning days on the stock market. Rumors of possible takeover offers for the whole company, or a major part of it, sent Glencore stock flying. Rumors of a Glencore takeover are coming from both Asian and European markets.
Glencore’s Volatility is Good for Investors
In fact, there are many factors accounting for GLCNF stock’s high volatility. Glencore has been in the spotlight for days. Just a week ago, the Anglo-Swiss mining group was penalized by investment bank papers published in early September after a heavy restructuring plan to cut debt. Then, this morning, Glencore experienced a turnabout. In Hong Kong, the stock jumped by a resounding 72% on rumors that the company would be selling its agricultural division.
More significantly, the rumors of a full takeover are lingering, which will ensure the kind of volatility that can offer investors large returns, whether they go long or short. The Hong Kong Stock Exchange’s volatility is related to low volumes. Compared to the London Stock Exchange, Hong Kong traded just five million shares or just three percent of the average shares on the LSE.
The low volumes favor the rises and falls in stocks. Some analysts have suggested that this explains Glencore’s volatility. However, the fact that Glencore rose by as much as 20% in London at the opening points to reasons based in the company’s prospects rather than market characteristics.
Just last Monday, Glencore lost 31% in a single session, sending investors in a frenzy because the stock fell sharply, going from 313 to 102 pence over the past year. Adding fuel to the takeover rumors, The Daily Telegraph writes that the management of the Glencore is considering any takeover bids, although difficult to arrive to offer “fair value.” (Source: Indebtedness is hurting Glencore – what must Ivan Glasenberg do to ensure it survives?, The Daily Telegraph, October 3, 2015.)
Chart courtesy of www.StockCharts.com
Bloomberg had reported that Singapore’s sovereign fund, Japan’s Mitsui & Co brokerage and a Canadian pension fund were mulling the acquisition of Glencore’s agricultural division, which was estimated to be worth some $10.0 billion.
Other than that, Glencore’s volatility is shrouded in secrecy as the company itself issued a note saying that it “is not aware of the reasons that can explain” these movements or “information to be announced at avoid market distortions.” The saga of Glencore stock continues.
Restructuring Could Be Bullish for Glencore Stock
Meanwhile, Glencore plans to restructure. At a conference in London, Glencore’s CEO, Ivan Glasenberg, justified the latest restructuring measures announced by the group by the need to remain profitable in a context of low mineral prices. “If you do not make money, you must stop production and reduce supply,” he said, as reported by the Financial Times. (Source: Rivals-must-shut-loss-making-mines, Financial Times, October 5, 2015.)
Glencore’s stock has come under strong pressure since the beginning of 2015, as investors worry about the company’s debt in a context of sharp decline in commodity prices, weighed down by slowing Chinese growth.
Last month, shares of Glencore suffered record losses. In the single day of September 28, Glencore shares lost 29%, comparable to Volkswagen AG’s loss. Except that in the German carmaker’s case, the loss was prompted by the revelations of deliberate deception with major legal implications and billions of dollars of fines.
In Glencore’s case, the losses reflect a veritable collapse of confidence in the company’s survivability. Investors are confident VW will recover in the medium term; that optimism seemed rather in short supply over Glencore’s $30.0 billion net debt and $100 billion between current and non-current liabilities. Considering the seemingly bottomless pit sucking in the valuations of raw materials, regardless of actual demand, especially copper, its revenue has dropped significantly as well as its gross operating margin.
It is sufficient to point out that for the first quarter 2015 compared to revenues of $86.0 billion, operating expenses accounted for $84.0 billion of those, generating an operating margin of just $2.0 billion. These margins are gobbled up by the borrowing costs. Yet, on Friday, Glencore started to recover some of the losses suffered earlier in the week, closing 4.37% higher in London.
So what else could be causing the stock to turn around, other than market volatility? The future of Glencore depends on two factors: the price of copper and debt reduction. Presumably, the market predicts that one or both of those things will happen.
Glencore Stockholders Banking on Copper Rebound
Glencore’s CEO has in fact shown cautious optimism about the evolution of copper prices, which fell in August to its lowest level in six years. He said that demand is still there and that market fundamentals will start to apply soon as the supply tightens, sustaining prices.
It should be stressed that demand for copper is not lower than it was in 2008 when commodity prices were on the back of record oil price. On the contrary, copper demand is actually increasing. But the high returns of the past have prompted a significant production—and therefore supply—increase.
Chinese demand has clarified the demand pattern. According a survey from last summer, a basket of more than twenty commodities imported by China grew more than 20% in volume on an annual basis. The numbers speak clearly: in 2005, China consumed 3.6 million tons of copper compared to almost 10 million tons in 2015, proving that Chinese demand for copper remains robust.
Glencore Stock Could Soar in Debt Resolution Scenario
On the debt side, we have two key factors. The first and most important is that related to the cost of debt. The cost of debt could become unsustainable in the case of rising interest rates or downgrading of credit. Currently Glencore is rated BBB.
Selling more shares would not make any significant difference, so it will have to dispose of some important units, possibly those related to agriculture, which are not related to its core business of mining. Estimates suggest that Glencore could raise about $10.0 billion from these, which is a bargain price because agricultural commodities, such as wheat, are also suffering.
Still, Glencore has little choice and it must make the sacrifice to survive. Among analysts, there are those who are betting on the stock such as at Citigroup, a frequent Glencore partner since the mining giant’s 2011 IPO.
After seeing its results dive into the red in the first half, the group announced in early September a series of drastic measures; including a capital increase, cuts in capital expenditure, sale of certain assets, or the suspension of production in two copper mines in Zambia and the Democratic Republic of Congo.
Glencore had said it wanted to reduce debt by $10.0 billion to bring around $20.0 billion. So, while a favorable market outlook sustains Glencore in the medium- and long-term, its shares benefit from the volatility generated by volume of reports, arguing for and against the stock.
Last week, Barclay’s analysts noted: “the market says that Glencore is in financial distress. Our credit colleagues believe that this finding is premature and do not share these concerns. They do not think that Glencore faces a risk of imminent default.” (Source: Glencore resumes slide despite investor meeting, John Mack share purchase, Mail Online, October 1, 2015.) Meanwhile, Investec published a note, warning shareholders, “If commodity prices remain at current levels, we believe that without major restructuring, almost all of Glencore’s value will evaporate.” (Source: Glencore slumps 30 percent as debt fears grow, Reuters, September 28, 2015.)
For the time being, the Glencore stock bulls have been better predictors of value than the bears.