The Strategist

Glencore to sell its Australian coal haulage business

10/20/2016 - 14:05

Glencore Plc. sold its coal haulage railway Grail in Australia to US rail operator Genesee & Wyoming Inc. for 1.14 billion Australian dollars ($ 873 million) within the company’s ambitious program to reduce debt.

Sale of GRail is "a significant portion" of the debt reduction program, commented Baar, a Swiss trader. 

The transaction price is higher than previously assigned value of $ 1 billion Australian dollars. Precisely at this sum company previously assessed GRail, the third largest business of transportation of coal in Australia.

Head of Glencore Ivan Glasenberg has been selling assets and shares, postponing payment of dividends and reducing costs over the past year, as his company has been trying to survive in the market with low commodity prices. He promised to reduce Glencore’s debt to $ 16.5 billion by the end of the year. Decline in prices in last year caused investors' concerns that the company might fail to pay debts.

"This deal has been discussed for some time, and the decision will be positive, leading to a partial reduction of Glencore’s debt ", - noted analysts at Investec Plc.

This year, the company is second in indicators in the British index. Share price has more than doubled against the background of coal and zinc prices. In this regard, concerns of investors about Glencore’s debt eased.

Sale of the division to American operator Genesee & Wyoming resulted in 4.7 billion - increase in total sales of assets within debt reduction program. The target level is $ 4 billion to $ 5 billion. The company also sold 49% of its agricultural business for $ 3.1 billion.

Once Glencore "composed its plan to reduce costs in the past year, the company fulfilled its promises and even exceeded them," said analysts of Sanford C. Bernstein. At the moment, the company is ready to achieve its goal to reduce the total debt, they emphasize.

Genesee & Wyoming will serve most of Glencore’s coal shipment operations, the total amount of which reaches 40 million metric tons per year in a 20-year contract.

The deal was supported by RBC Capital Markets. Now, it must be approved by the Supervisory Board on foreign investment in Australia.

The third in the world by market capitalization, a diversified mining company in January-June recorded a net loss of $ 369 million compared with $ 676 million for the same period last year. The company managed reduce the loss through spending cuts.

Glencore's revenue decreased by 6% to $ 69.4 billion due to lower commodity prices. The company’s performance was also affected by reduction of production volumes of copper, zinc, coal and oil in the first half of 2016 compared with the same period in 2015.

the company's share price this year has more than doubled due to sharp rise in raw material prices. Higher prices were triggered by decline in production, as well as strong demand in China, which is the world's largest consumer of many commodities.

As of June 30, Volume of Glencore's net debt amounted to $ 23.6 billion, compared with $ 25.9 billion at the end of December.