By Olivia Kumwenda-Mtambo
JOHANNESBURG, Sept 7 (Reuters) – Mining and commodities trading firm Glencore on Monday said it will suspend dividends, sell assets and raise $2.5 billion in a new share issue as it aims cut it net debt to $20 billion by the end of next year.
The London-listed company has been under pressure to cut debt – which stood at $29.6 billion at the end of June, as prices for its key products, copper and coal, have sunk to more than six-year lows.
Glencore said 78 percent of the proposed equity issuance was underwritten by Citi and Morgan Stanley, while its senior management will take up the remaining 22 percent.
It also said it would not be paying a final dividend for 2015, which would save about $1.6 billion, while around $800 million would be saved from the suspension of the 2016 interim dividend.
The company added that it expects to raise about $2 billion from the sale of assets and $500 million to $1 billion will be saved from further cuts in capital spending to the end of 2016.
Glencore’s share price has slumped by nearly 60 percent this year to record lows, a much worse performance than that of rival miners like BHP Billiton and Rio Tinto.
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Standard & Poor’s warned last week it may lower Glencore’s ‘BBB/A-2’ credit ratings, if the company’s ratio of adjusted funds from operations to debt failed to recover to more than 23 percent from 20 percent in the year to June 2015.
“We would likely lower the rating on Glencore if we perceive reduced commitment to defending the rating or if commodity prices persist below our price deck or fall further, absent material offsetting factors,” S&P said last week.
But the rating agency said Glencore’s scale in the trading business and its plans to cut capital spending should help it hold onto the rating.
Moody’s reaffirmed its Baa2 ratings on Glencore with a stable outlook but said the company needed to cut its gross debt further to support the rating.
From Bloomberg
Glencore Plc, the commodity producer and trader, plans to sell assets and shares to cut its $30 billion net debt by about a third following the rout in global markets.
Baar, Switzerland-based Glencore, which last week posted its biggest weekly decline in London since going public in 2011, plans to sell about $2.5 billion in new shares and assets worth as much as $2 billion. It also will suspend dividend payments until further notice as it plansto reduce its net debt by about $10.2 billion, the company said Monday in a statement. Glencore shares rose as much as 13 percent, a record intraday gain.
“It’s clear people want us to get the balance sheet in line with potentially lower commodity prices,” Chief Executive Officer Ivan Glasenberg said in a phone interview, commenting on his meetings with shareholders in the past two weeks. “This strengthens the balance sheet even if commodity prices go down further.”
Glencore has lost more than half its market value this year, and along with BHP Billiton Ltd. and Rio Tinto Group has seen profits slump as commodity prices plunged to touch a 16- year low last month. Standard & Poor’s cut Glencore’s outlook to negative from stable last week, saying weaker growth in China will weigh on copper and aluminum prices.
Providing Flexibility
“This significantly improves the balance sheet of the company, it comfortably places Glencore in investment grade territory by rating agencies under most commodity scenarios, and gives the company flexibility to weather any downcycle and is likely to remove the markets concern on the downside,” Citigroup Inc. analyst Heath Jansen wrote in a note Monday.
Glencore stock climbed 9 percent to 133.70 pence as of 8:45 a.m. in London, paring this year’s decline to 55 percent. The shares slumped 17 percent last week.
The company may consider selling a minority stake in its agriculture unit as part of the plan, Chief Financial Officer Steve Kalmin said in a phone interview.
Morgan Stanley and Citigroup Inc. will underwrite 78 percent of the proposed share sale. Glasenberg and Kalmin and several board members will take up the remaining 22 percent. The company said it will save $1.6 billion from suspending its 2015 final dividend and a further $800 million from suspending its 2016 interim dividend.
Debt Target
Glencore’s net debt was $29.6 billion as of June 30, according to an Aug. 19 filing. It’s rated at BBB, the second- lowest investment grade, by S&P. Glencore said Monday it’s targeting a net debt figure in the “low $20s billion” by the end of next year.
“It’s a reasonably aggressive debt reduction,” Michael Bush, head of credit research at National Australia Bank Ltd., said by phone from Melbourne after the statement was released. “Maybe they haven’t done quite enough to remove the negative outlook, but it certainly does reduce the pressure on their rating.”
Should weaker prices persist, other commodity suppliers will probably need to follow Glencore’s action to prioritize debt reduction, Bush said. “This will be the first of many such moves,” without a rally in raw materials prices, he said.
Glencore also said it had suspended copper production from its Katanga operation in the Democratic Republic of Congo and its Mopani project in Zambia for 18 months. The suspension will remove about 400,000 metric tons of copper cathode from the market, Glencore said.
