Newly listed Glencore is the JSE’s third-biggest company, but not in the Top 40 – when will it be?
The listing of mining and commodities group Glencore Xstrata was a major event, and the Swiss headquartered group is now the third most-valuable company listed on the JSE. However, because local ownership levels remain low – Glencore has its primary listing in London, and is also listed in Hong Kong – the company is not yet included in the JSE's Top 40 Index. The first day of trading saw some major volume, but as ABSA Capital's Richard Stout explains, until 5% of Glencore is owned by locals, the JSE won't include the group in any indices. Stout looks at the dynamics likely to drive trade in Glencore stock over the next few months, and discusses the possibility that Glencore might be included in the JSE Top 40 as early as next year. – FD
ALEC HOGG: Glencore became the third most valuable locally listed company when it made its JSE debut yesterday. It's worth 715 billion rand, but at least five percent of that needs to be held by locals before the stock can be included in the JSE indices. To this end, the company was trying to place shares with institutions yesterday. ABSA Capital's Richard Stout is with us. My information Richard is that there was a book build in process, but that didn't happen.
RICHARD STOUT: No, Glencore had no need to raise primary capital themselves, nor were there any existing shareholders who were willing to sell into the listing yesterday. What essentially happened was that Glencore listed by introduction only. A big part of our role in the lead up to that listing event was to educate investors around the company and ensure that the local investor base, were fully up to speed with the company and able to make an investment decision around buying stock once trading commenced yesterday morning. What we found was the efforts we undertook, translated into significant buying from the local investor base. In total, nearly 52 million shares traded yesterday, which we largely interpreted as buy orders from the South African investor base who had the ability to buy Glencore from yesterday and have that classified as a domestic equity in their portfolios.
ALEC HOGG: 50 million shares at round about 50 rand each.
RICHARD STOUT: Correct, so it was just around two and a half billion.
ALEC HOGG: That's a long way from 38 billion.
RICHARD STOUT: Absolutely, but I think the company and the market recognises that it will take some time to get to that five percent threshold, but we will get there eventually.
ALEC HOGG: Just unpack that for us. That five percent threshold would be in market cap terms. South Africans have to own five percent of the company, which is round about 38 billion before…
RICHARD STOUT: Before the company qualifies for indexation, inclusion in the local market, so there's an important distinction to make. The company, by listing on the JSE, is now classified as a domestic equity so essentially all South African investors, be it retail or institutional, can own Glencore shares without eating into their foreign ownership limits. The next threshold as you mentioned, is getting five percent of the market cap onto the register, which would then trigger indexation inclusion in top 40 in the Swiss indices as well.
ALEC HOGG: That would give rise to another wave of buying.
RICHARD STOUT: You'd anticipate that – yes, absolutely.
ALEC HOGG: How big is the second wave – if you like – the indices, the indexation, and things like SATRIX?
RICHARD STOUT: It's difficult to quantify. A lot of funds do follow the index quite religiously, but then there's another pool of liquidity that follow it slightly more loosely and that's the kind of pool of liquidity that's slightly harder to quantify. We certainly think that some of those investors will start buying in anticipation of index inclusion, as that five percent threshold gets closer. We don't expect there to be a sudden pop in incremental buying once that trigger is met. We think that it will happen over time, over the next few months. The JSE has come out and said that the next opportunity for Glencore to be considered for inclusion is going to be at their March quarterly review. We do think that over the next few months there will be gradual buying up of stock – obviously from fundamental buyers, but also from these index-tracking funds in anticipation of that event.
ALEC HOGG: There would presumably also be some switching.
RICHARD STOUT: Yes, we believe so. Certainly, when we've spoken to investors there tends to be a general kind of pear trade whereby investors are seeing this as an alternative investment into a globally diversified miner, to the likes of BHP and Anglo American. We wouldn't be surprised to see some switching out of those two into Glencore.
ALEC HOGG: If I were a hedge fund player, I'd be going 'long Glencore, short Anglo'. It's obvious because it appears as though Glencore is going to have this almost inherent demand, whereas… What are you going to switch out of?
RICHARD STOUT: Well, we'll see what happens, but I think many investors are certainly trying to make room for Glencore, and given the size of the company, we anticipate significant buying orders for the stock. Whilst investors sit on significant pools of liquidity that they can put into this without necessarily having to juggle their existing portfolios, we do think there'll be some selling if they use the other two stocks to make room.
ALEC HOGG: You had the opportunity to go around and talk to investors in South Africa. What has the reaction been?
RICHARD STOUT: I think they're taking it very positively. The ability to get exposure to what is a globally diversified miner as an alternative to the other stocks listed down here, to get exposure to that through a domestic listing, has been very well received. I think investors have also recognised that it's a strong statement from Glencore around the ongoing commitment to the African continent. They are one of the largest mining operators on the African continent, and this is seen as an important step in their future strategy.
ALEC HOGG: Are many South African institutions invested in Glencore already, through their offshore allowances?
RICHARD STOUT: There were some investors who had holdings through the London Line – not that many – again, through these foreign ownership limits, so we certainly see this as being the big trigger even to seeing South African ownership. We anticipate that some of those holders that did hold the London Line will move that over to Johannesburg in order to reclassify their holding as a domestic equity.