JOHANNESBURG — It looks like Glencore is driving home that old economic axiom that investors expect high reward for high risk. Despite dealing with a series of scandals in 2018 – especially its links to controversial Israeli middleman Dan Gertler – Glencore expects to report record earnings when its results are published. It leaves one wondering whether there’s a lag-effect at play here and whether the business will ultimately still pay for some of its risky decisions, just like Facebook has recently learnt… – Gareth van Zyl
By Thomas Biesheuvel
(Bloomberg) – Glencore Plc may have had a nightmarish year so far, but the world’s top commodity trader is still raking in mountains of money. The company is facing a US corruption probe, got mired in a dispute with its billionaire former partner in the Democratic Republic of Congo and has been caught in the fallout from new US sanctions on Russia – among other issues. Yet despite all the bad news, Glencore is expected to report its most profitable six months ever when the company publishes first-half results Wednesday.
While some of the issues have since been resolved, the company’s shares are down about 20 percent this year, compared with gains by rivals like BHP Billiton Ltd. and Anglo American Plc. Analysts are more optimistic, meaning that Glencore’s share discount to the average target price is near its widest in half a decade.
“Glencore has always had reputational issues, but even by their standards this has been a particularly horrific six months,” said Ben Davis, an analyst at Liberum Capital Ltd. “Glencore is showing that it’s a riskier beast than its rivals and it trades at a discount because of that.”
Here’s what’s gone wrong for Glencore this year:
- December-February: Partner Dan Gertler is sanctioned by the US; Glencore is forced to stop paying royalties to the billionaire.
- March: Glencore’s Congo unit says it may face legal action over a capital shortfall.
- April: Partner United Co. Rusal is sanctioned by the US; Glencore cancels a planned share swap and declares force majeure on some aluminium contracts.
- April: A Congo court freezes Glencore assets in the country after it failed to pay Gertler royalties.
- May: Bloomberg reports that the UK’s Serious Fraud Office plans to seek formal approval for a full probe into Glencore’s dealings in Congo.
- June: Congo adopts a new mining code that was fiercely resisted by companies including Glencore.
- July: US authorities say they’re probing the company for possible corruption in Nigeria, Congo and Venezuela from 2007 to the present.
Despite all that, Glencore is expected to report adjusted earnings before interest, taxes, depreciation and amortization of about $8.5 billion in the first half, its biggest ever.
Those earnings are likely to be driven by bumper profits from coal – Glencore is the world’s biggest shipper – where prices have surged, along with increased copper and cobalt production. The company has already forecast that profits from its hallowed trading business will be close to an all-time high.
Glencore is the last of the big miners to report first-half earnings – BHP Billiton runs on a different financial calendar and will post full-year results later this month – with Rio Tinto Group and Anglo already reporting big profits. The companies’ use of extra cash has diverged, with Rio saying it would funnel $7 billion back to shareholders, while Anglo approved a $5 billion new copper mine.
Glencore has favoured building a war chest for deals in recent years rather than giving money back to shareholders. Yet last month, just days after being hit by the US probe, it announced it was buying back $1 billion of shares. The repurchase amount could be increased this week, Liberum and Macquarie Group Ltd. suggested.
“I expect an increase in the buyback but management might be reticent, especially if they want the firepower to go out and do other things,” said Davis from Liberum.