The Strategist

Glencore's investors want Glasenberg to stay away from acquisitions

08/18/2016 - 15:53

A year ago, Glencore was on the verge of crisis. Yet, the company managed to improve the situation through debt reduction, asset sale and thanks to increase in prices for raw material. Now, shareholders of the mining and trading company hope that its CEO Ivan Glasenberg would not start buying assets again.

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Glasenberg turned Glencore from commodity trader in one of the world's largest mining companies. The manager purchased Xstrata for $ 29.5 billion in 2013, bought coal, copper and gold mines in East Africa, South America and Australia. Yet because of that, Glencore’s debt rose, and commodity prices collapsed in the past two years, pulling the company's stock price down. 28 September 2015, they decreased by 29%. Under pressure from investors, Glasenberg suspended dividend payments, skeletonized the staff and focused on reducing the debt.

The company's position has improved since then, though the loss amounted to almost $ 5 billion in the last year. In the second half of 2015, Glencore’s net debt declined from $ 29.6 billion to $ 25.9 billion, and the company plans to reduce it to $ 17-18 billion by the end of 2016. Since its freefall, Glencore’s shares rose by about 180%, but the quotes are still more than 60% lower than during the IPO in 2011. 

Recently, it became clear that the company wants to buy several major assets, including those belonging to Rio Tinto and Anglo American in Australia. Investors say that Glasenberg still has to do something before new round of acquisitions. They hope that the company would pay more attention to cost-cutting on August 24, during the financial report’s presentation. 

Glencore’s spokesman declined to comment.

Glencore has already raised $ 2.5 billion through additional issue of shares, and $ 1.4 billion due to advance payments for gold and silver supplies. Delayed dividend payments helped save additional $ 2.4 billion. In the second half of the year, Glencore plans to earn about $ 3.13 billion from sale of half of its agricultural business, and $ 100 million from sale of gold deposits in Kazakhstan. The company is also considering a possibility to get rid of another Kazakh gold mine for about $ 2 billion, and rail assets in Australia for $ 750 million, analysts said.

According to Charl P. de M. Malan, a Senior Analyst at Van Eck Global, Glencore should focus on the debt, returns deposits to shareholders, and only then look for new investment. Van Eck Global has about $ 200 million in Glencore’s shares. Malan says the company’s management should not seek to increase coal or copper production, but instead act in the shareholders’ interests.

Possible reduction in prices for raw materials put the company in danger. According to some analysts, prices have increased due to the economic stimulus in China this year, so they may fall as soon as the government program ends. Also, some investors are questioning stability of the coal’s price in the long term. Glencore itself is confident that demand for coal used for power generation, is going to grow for quite a long time, especially in Southeast Asia.