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Mining group Glencore is locked in an existential battle in the toughest of arenas. With a share price that’s now lost three quarters of its value in six months, the company’s stock took another massive hit in Hong Kong this morning. Traders have latched onto worries about the company’s debt mountain which have been amplified by concerned reports from investment banks Investec and Goldman Sachs. South African Ivan Glasenberg’s company is now fighting for its life. Its fall from grace been so rapid that we’re reminded of author Ernest Hemingway’s warning of how someone goes bankrupt – “gradually, then suddenly.” Glasenberg is smart, tough and able to hold his corner in any fight. He’s going to need those attributes during the next few weeks as traders test Glencore’s resilience. Those running other mining majors BHP Billiton, Anglo American, Rio Tinto and Vale will be watching with more than casual interest. Because should Glencore fold, one of them is certain to be the next target. – Alec Hogg
by Thomas Biesheuvel, Eddie van der Walt and Jesse Riseborough
(Bloomberg) — Ivan Glasenberg is running out of luck.
The South African-born accountant, whose Glencore Plc rode the China-fueled boom in commodities the past 10 years like no one else, is emerging as the most prominent casualty of the bust.
The descent has been so swift that many investors are now wondering where it will end. As Glencore’s share price fell by 27 percent in Hong Kong Tuesday, the credit markets registered mounting worries about its debt load: Its bonds tumbled and derivatives traders started demanding upfront payments to protect against a default by the company, the first time that’s happened since 2009. Its London shares plunged by almost a third Monday, bringing losses since March to about 76 percent.
“People smell blood, and they are circling,” said Clive Burstow, who helps manage $44 billion at Baring Asset Management in London. “The market is looking for someone to test and Glencore is in the sights.”
While traders were at a loss to identify the catalyst for Monday’s rout, the underlying reasons have remained constant: commodity prices are too low, Glencore’s debt is too high and growth in China, the engine that drove prices for everything from copper to coal to oil is the weakest it’s been in a quarter century.
In recent weeks, Glencore has sought to reassure investors by promising to prepare its finances for any doomsday scenario. Even after scrapping the dividend, raising $2.5 billion in a share sale and vowing to sell assets, the selloff has continued.
“All of the miners, including Glencore, broke nearly every rule in the mining books these past 10 years — and that includes the holy books about debt,” Peter Major, a mining analyst at Cadiz Corporate Solutions in Cape Town, said by phone. “Now almost all of them are paying the price.”
At its height in 2014, Glencore was worth more than $85 billion after its $29 billion all-share takeover of Xstrata Plc, then the world’s biggest coal exporter. Even as recently as August 2014, Glasenberg made an approach to buy Rio Tinto Group, the second-biggest miner. That was rebuffed. As of Monday in London, Rio’s market capitalization was $59 billion, almost four times Glencore’s.
Glencore, based in Zug, Switzerland, trades everything from wheat to oil to cobalt. It’s the world’s biggest exporter of power-station coal, with more than 30 mines in Australia, Colombia and South Africa and is among the top three agricultural exporters in Russia, the European Union, Canada and Australia. The company controls more than 150 mining and metallurgical, oil production and agricultural assets and employs about 180,000 people.
For all that, Investec Plc, an investment bank, said Monday that there would be little left for shareholders should low prices persist. Goldman Sachs Group Inc. said last week that Glencore’s steps to reduce debt and bolster its balance sheet were inadequate.
Glasenberg, a former coal trader, honed his skills over more than 30 years in the commodity trading business since he joined a predecessor firm, Marc Rich & Co., in 1984. He was part of a $1.2 billion management buyout from Rich in 1994, which saw the company renamed Glencore. The 2011 IPO made him a billionaire on paper with his stake worth almost $10 billion.
Glasenberg has also been one of the industry’s most outspoken figures, railing against rivals for oversupplying the market and saying fellow executives had “screwed up” by building too many mines. He has also taken the lead on trying to remedy the problem, cutting output at its Australian coal mines and saying last month that it would close copper mines in the Democratic Republic of Congo and Zambia that account for about 2.2 percent of global supply.
Glencore’s rivals haven’t been left unscathed. In London trading, BHP Billiton Ltd., the world’s biggest mining company, has fallen 26 percent this year, while Rio Tinto has declined 30 percent. Anglo American Plc, which like Glencore is highly leveraged, has slumped 53 percent. The Bloomberg World Mining Index of producers has shed 32 percent this year.
The slide continued in Asia on Tuesday, with Rio’s Sydney- traded shares losing 5 percent to A$46.335 and BHP slipping 6.1 percent to A$21.73 as of 11:31 a.m. in Sydney.
“The sector is having a tough time,” said John Meyer, a mining analyst at broker SP Angel Corporate Finance LLP in London. Glencore and the other miners are going to have a tough time until at least year end.’’
Glencore announced a debt-cutting program earlier this month in an attempt to reduce the company’s borrowings to $20 billion from $30 billion. The company has also has hired Citigroup Inc. and Credit Suisse Group AG to sell a minority stake in its agricultural business, a person familiar with the situation said Friday. The company carries a heavier debt load than its rivals as it uses borrowings to help fund its trading operations though has also boosted debt with acquisitions including the C$6.1 billion ($4.6 billion) purchase of Canadian grain trader Viterra Inc. in 2012.
Still, not everyone shares that doom.
“When you see this sort of fire sale, either a business is going bust or there are forced redemptions,” said Meyer “Funds are being forced to sell into a weak market. For me it offers an unparalleled opportunity.”
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