How do you make a £2bn fortune from commodities? Answer: start with a £6bn fortune.
Ivan Glasenberg, chief executive of Glencore, won’t be laughing. Those numbers are the value of his shareholding in the mining and commodity-trading company at flotation in 2011 and now. Yes, Glencore’s share price really has fallen by two-thirds, from 530p to 180p, since it came to market with a fanfare. Among London’s big miners, only Anglo-American has done worse.
This week alone the fall has been 10% as the China-inspired rout has run through commodity markets and mining stocks. Glencore is being whacked harder than the likes of BHP Billiton and Rio Tinto for a simple reason – relative to earnings, it has a lot more debt.
Analysts predict borrowings will stand at about $48bn when the company reports half-year numbers next week, which is a hell of a sum even for a business making top-line (before interest and tax) earnings of $10bn-$12bn. Bold borrowings aren’t quite what they seem, it should be said, because Glencore’s marketing division holds a stockpile of commodities as inventories that can be turned into cash. Viewed that way, net debt might be nearer $30.5bn at year-end, estimates JP Morgan Cazenove.
But here’s the rub: Glencore might have to go ahead and turn some of that stock into cash if its wants to save its BBB credit rating. “At spot commodity prices, we calculate net debt needs to fall $16bn by year-end 2016 to safeguard Glencore’s BBB credit rating,” says JP Morgan. Preservation of BBB is a financial priority, Glencore said in March, for the sound reason that a healthy rating is vital to keep funding costs low in the trading-cum-marketing division.
It’s a financial challenge caused by the plunge in prices that is undermining profits on the other side of Glencore – the mining operation concentrated on the old Xstrata assets, which are skewed towards copper and coal.
If you’re an optimist on Glencore, the company has enormous financial flexibility. The marketing division, famed for being able to make profits in all weathers, can be reined in to reduce debt, albeit at the cost of lower earnings the following year. “I am extremely confident there is no liquidity crunch coming for Glencore,” says Richard Buxton, well-regarded fund manager at Old Mutual.
For now, though, the bears have the upper hand, and the world of big mining is agog. Glasenberg is the industry’s towering figure with a habit of telling rivals how they’ve messed up their businesses by over-investing at the wrong moment in the commodity cycle.
At 180p, though, the stock market is saying it is Glencore, not BHP or Rio, that needs to show how it can manage the pain in the downturn. A production report lands on Thursday, but nothing less than a full strategic update will suffice with the interims.
China causes confusion
Super Thursday – the Bank of England’s overload of information on inflation projections and interest rates – was only a week ago. But, already, the outlook seems slightly less clear.
China is the chief source of confusion, of course. Beijing’s “one-off” adjustment to the yuan has been followed by a second. They are baby steps, it might be argued, rather than a declaration of currency war that will deliver deflation in the west. On the other hand: 2% here, 2% there, and pretty soon you’re talking serious devaluation.
The other puzzle is closer to home – the labour market. A week ago, governor Mark Carney was insistent that the employment market is tightening, despite the latest figures showing unemployment rising slightly and employment growth slowing.
Deputy governor Ben Broadbent backed him up: “It’s only in the latest data you see this rise in unemployment. The data are also quite volatile on a short-term basis, so we’ll have to see whether this persists.”
Well, it’s still persisting. The number of people in work was 63,000 lower in the three months to June than in the previous quarter, the Office for National Statistics said on Wednesday, and the number of unemployed rose by 25,000.
These are small movements and two months of data doesn’t mean the market has definitely turned. All the same, last week’s statements look too confident.
Light at last for Balfour
It’s a miracle: Balfour Beatty has spoken and hasn’t announced fresh write-downs. Last month’s collection of charges for underpriced contracts still ruined Wednesday’s half-year figures – pre-tax losses were £150m – but there is now a sense that new-ish chief executive Leo Quinn can look forwards.
Investors are: the share price has risen by almost a fifth since July’s write-downs. That’s understandable. Balfour’s balance sheet is solid, and there is the backing of £1.2bn-worth of PPI assets. Plus, the great advantage with construction companies is that the contracts rarely run for longer than two or three years, allowing the poison to wash away. Quinn still has to prove Balfour can generate acceptable construction margins of 2%-3%. But the possibility of a decent recovery exists.
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