🔒 Why investors are turning their backs on Glencore – The Economist

EDINBURGH — Investors who bought Glencore shares at the time have lost 48% of their money since 2011 — a worse return than any of its big ftse mining peers except for Anglo American, says The Economist. The company’s chief executive Ivan Glasenberg failed to spot a commodities-price wobble coming in 2015, which in turn required a humbling $2.5bn capital infusion to fix the balance-sheet, it says. After recovering, shares have slipped again since the start of 2018 and trade at just 7.3 times this year’s estimated earnings, notes the respected business and finance journal. Its analysts size up Glencore’s rise to become a major mining company and caution that current troubles don’t bode well for the business. – Jackie Cameron 

By Thulasizwe Sithole

Once a commodities trader, in recent years Glencore has been shaping itself as a global mining company competing with the likes of Rio Tinto and Anglo American. But Glencore is losing its lustre for investors. The Economist explains why, pointing to questionable business practices and a bad smell lingering over its Africa operations.

“Glencore’s dealings in Congo have landed it in a hole as deep as Kamoto. Authorities in America, Canada and Britain are probing whether its executives, known in the industry for their sharp suits and elbows, deployed even sharper business practices to get ahead. Investors have started to question the firm’s prospects; its share price has slumped.

“Mining firms once encouraged to emulate Glencore’s aggressive culture now wonder whether their old-fashioned approach might not have more merit after all.”

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The Economist says that when the firm listed its shares in London in 2011, it was the first in a generation to be propelled straight into the blue-chip ftse 100 index. “Its top brass, particularly Ivan Glasenberg, a brusque South African who joined in 1984 and who has been chief executive since 2002, were lauded as visionaries in a staid field.”

At least five senior executives were revealed to be billionaires — almost unheard of for employees rather than founders of any company, whatever the industry. Around 40 top traders held shares valued at over $200m each, it continues.

The Economist suggests that Glencore is fundamentally different from its mining rivals because it is run by a commodities trader rather than an engineer.

“An accountant by training, Mr Glasenberg’s spiritual home is the trading floor. Unlike hedge funds, commodities-traders do not make money on fluctuating prices, but by working out how to get the best price for whatever they can source,” it says.

“The job is more logistics than speculation. A wrinkle in markets might mean a pile of high-quality coal and a low-quality one are worth more if blended together into a medium-quality grade. Access to natural resources is vital, and tricky. In recent years, Glencore has made loans to ‘state-owned’ oil firms in Libya and Iraqi Kurdistan, for example, to be repaid in barrels. (That trick works so long as the “state” in question keeps control of the oilfields.) Glencore handles over 90 commodities, from soya beans to aluminium.”

Trading, points out The Economist, is a fabulously lucrative business. “Returns on equity at Glencore’s operation can top 40% a year. But there are limits to how big it can get. So Glencore branched out.”

Instead of just securing the offtake of mines, it wanted to own them. “With little in-house engineering nous, it has mostly bought facilities set up by others (or so sniffy rivals decry). Its transformation was complete when in 2013 it took full control of Xstrata, a big coal venture,” says the publication.

Glencore is now overwhelmingly a mining group: around two-thirds of its $8.6bn in adjusted operating profits last year came from stuff coming out of the ground. But its DNA is still that of a trader’s. “Sometimes it cuts its own production to support prices: a sort of one-firm opec. It is nimbler than rivals, and more opportunistic.”

The superlatives are less frequently heard now than they were at the time of listing.

The Economist provides a long list of issues worrying investors, including:

• Exposure to Russia; Glencore has stakes in Rosneft and Rusal, two firms active in oil and aluminium respectively, both battling American sanctions;
• Its investment in Congo, a country avoided as too risky by Glencore’s big rivals. Tricky conditions have necessitated $7bn in investment to improve its mines there. The political landscape has worsened and remitting profits abroad is harder. In June Glencore wrote off $5.6bn it loaned to a joint venture with a government-owned miner, in exchange for equity and, in November, cobalt at Kamoto was found to be contaminated with uranium. Sales are suspended until a plant to remediate the radiation can be built;
• Its relationship with Dan Gertler, a controversial Israeli businessman who won favour with the ruling Kabila family by offering $20m to finance the purchase of arms, which the current president’s father used to win a bloody civil war. American authorities now have Gertler in their sights;
• Glencore’s fight against claims it has violated American sanctions, largely by means of having paid Mr Gertler his dues in euros, and outside America;
• Corruption allegations. On July 3, Glencore announced it had received a subpoena from America’s Department of Justice (DOJ) in respect to compliance with the Foreign Corrupt Practices Act; its activities in Congo, as well as in Venezuela and Nigeria, were cited. Britain’s Serious Fraud Office is also reported to be investigating Glencore on matters relating to Congo, as is the Ontario securities regulator in Canada.

Glencore’s market value fell by $5bn on the news of the DOJ investigation — an amount more than five times greater than the biggest fine ever meted out under the relevant statute, notes The Economist. “That reflects investors’ fear not only of a large penalty, but also that American authorities could in effect force a change of direction at the company.”

How and when the Glasenberg era ends is what investors are most curious about now, says the business publication.

“Aged 61, he has already started indicating to investors he won’t be around for more than three to five years — as it happens, roughly the time frame of a doj investigation of the scale Glencore faces. None of his lieutenants are in line for promotion; even in the gossipy world of mining, no one has any idea who will succeed him,” it adds.