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At Glencore, a Mining Emperor Tries to Save His Realm

The morning he closed the biggest mining deal in history, Ivan Glasenberg pulled out a map dotted with mines around the world.

The hard-charging chief executive of Glencore PLC was jubilant. It was May 3, 2013, and his trading company had just merged with Xstrata, one of the world’s biggest mining companies, in a $29.5 billion deal. And he had won a boardroom struggle to stay in control.

The map detailed his sprawling new empire of mines for everything from copper to coal to zinc. He had even circled competitors’ mines that he could add to his collection.

“Damn sure I’m going to be opportunistic,” he told Wall Street Journal reporters and editors at his London headquarters. “We’ll buy anything if it makes economic sense.”

Then he struck a note of caution: “Will commodity prices stay strong” and “justify putting this much money into an asset-rich company? Have we done the right thing? This is my biggest fear.”

More than two years later, those fears have become a reality for Glencore, the large mining company hit worst by declining prices for raw industrial materials such as copper and coal.

Glencore lost $676 million in the first half of 2015, and its debt levels have sent investors fleeing. Glencore’s stock price has fallen by nearly three-quarters since the Xstrata deal—including a 29% drop Monday that has since been partially erased. Glencore executives are trying to stop the bleeding by selling assets and cutting billions of dollars in debt. The company last month said it would suspend its dividend and raise $2.5 billion in a share offering.

For years, Mr. Glasenberg’s brash style and candor had charmed investors and rankled competitors. But his two big bets—taking Glencore public and buying Xstrata—have soured, with nearly 83% of the company’s market value wiped out since the initial public offering in 2011.

World tour
Now Mr. Glasenberg is on his heels. He has been jetting around the world visiting mines, trading offices and banks, sometimes touching down in two countries a day, to gather information and reassure bankers, investors and employees.

People who have spoken to him say that despite the crisis, his mood has remained buoyant and his outlook confident. He has told people that markets have overreacted and that the panic is a side effect of being a public company, although he has also noted the risks of carrying too much debt and owning mines at a time of weak commodity prices.

On Tuesday, the company assured the market that Glencore’s business “remains operationally and financially robust.” On Wednesday, Mr. Glasenberg dispatched a credit team to the London office of Barclays PLC, where it told bondholders that concerns about a credit downgrade were overblown.

Glencore’s bankers told reporters the company’s balance sheet is solid and the debt plan is in place, but the market is acting irrationally.

P1-BV027_GLASEN_16U_20151001185501 Mr. Glasenberg’s board of directors also is trying to boost confidence. Chairman Tony Hayward purchased $138,000 in shares, and member John Mack, Morgan Stanley’s former CEO, $673,000 worth this week. Glencore executives spent about $540 million on shares when the company issued new equity.

Mr. Glasenberg has continued telling investors that the Xstrata deal was a great one, delivering strong cash flow and earnings, according to people familiar with the conversations.

Mr. Glasenberg took an unusual approach to running mines. He bet his team of traders could make big money peddling product from an empire of second- and third-tier mines acquired on the cheap. Glencore had enough scale—60% of the world’s zinc, 50% of copper and 45% of lead markets in 2011—that its traders could profit from their deep knowledge about supply and demand.

That worked well during a commodities boom, when prices for copper, gold, iron ore and other raw materials soared. But the bust reduced demand, exposing the high costs and inefficiencies at many of Glencore’s mines. Investors grew concerned about Glencore’s highly leveraged balance sheet, which as of June 30 carried $29.6 billion in net debt—which doesn’t include trading-arm debt.

Anglo-Australian mining giants Rio Tinto PLC and BHP Billiton Ltd. have fared better, despite plunging prices for their key commodity, iron ore. BHP had $24.4 billion in net debt, while Rio Tinto had $13.7 billion. But neither company has massive trading operations dependent on keeping an investment-grade debt ratings, which is now under threat at Glencore.

Last year, with commodities prices already tumbling, Mr. Glasenberg bid to merge with Rio Tinto—only to be rebuffed by Rio.

Mr. Glasenberg “has always had a very high risk tolerance, and that’s obviously come back to bite him,” said Anthony Sedgwick, fund manager at Abax Investments in South Africa and a one-time Glencore investor.

Mr. Glasenberg is one of Glencore’s biggest shareholders, having kept a nearly $10 billion stake in the company’s $59 billion public offering in 2011. That stake is now valued at $1.7 billion.

His image as the mining industry’s alpha male is driven by what he describes as an obsession for information about commodities markets. He spends 80% of this time on the road, meeting national leaders and his own workers. He has said he doesn’t take vacations and frowns upon employees who do.

Mr. Glasenberg, born in 1957 in South Africa and raised in Johannesburg, joined controversial financier Marc Rich’s trading firm in 1984. He swiftly rose through the ranks, taking control of its world-wide coal business in 1990. In 1994, Mr. Glasenberg and a team of executives bought out Mr. Rich for $1.2 billion and launched Glencore.


Until then, the trading house had largely avoided owning big mining assets, which its traders saw as unpredictable and subject to commodity slumps.

But Glencore, under the direction of Mr. Glasenberg and then-CEO Willy Strothotte, showed an appetite for mining deals in unpredictable, risky places. In 1995, it snapped up a coal project in Colombia at a time when the country was racked by a bloody drug war. Two years later, it bought a majority stake in a mining company in the former Soviet nation of Kazakhstan. It also bought coal assets in South Africa, then emerging from decades of apartheid.

Mr. Glasenberg has said owning mines would provide consistent product for Glencore’s traders, who bought and sold natural resources around the world. He says that because his traders can ship product to wherever the best price can be found, the quality of the mine isn’t necessarily important.

Glencore became known as a go-to company for mining CEOs looking to sell unwanted assets, says Dick Evans, former CEO of aluminum giant Alcan Inc.

Mr. Glasenberg, who likes to say he’ll “buy anything if the price is right,” justifies such acquisitions by saying they can provide good return on equity if prices are favorable.

In 2001, Alcan sold unprofitable bauxite-refining operations in Jamaica to Glencore for $175 million, taking a $70 million write-down on the transaction. But in 2009, as markets crashed, a Glencore subsidiary booked a $73.2 million loss partly on the sale of Jamaican assets.

That same year, an industry acquaintance of Mr. Glasenberg’s, Mick Davis, took the helm of Xstrata, a tiny natural-resources company partly owned by Glencore. The move surprised industry watchers because Mr. Davis had recently served as chief financial officer of big Australian miner Billiton, which had just merged with BHP, forming BHP Billiton.

Going public
A year later, Xstrata went public, with Mr. Davis as CEO. The same year, Mr. Glasenberg became CEO of Glencore, which still owned more than a third of Xstrata.

They began building a business partnership—and rivalry—just as demand from China began to turbocharge commodity markets. Prices for everything from copper to zinc to iron ore took off.

Mr. Davis was concerned he might find himself bidding against Mr. Glasenberg for the same assets, according to people familiar with the matter.

Mr. Glasenberg made several overtures to Mr. Davis in the late 2000s to buy the balance of Xstrata not already owned by Glencore. Mr. Davis pushed back, saying he wasn’t able to merge with a private company that was hard to value. If Glencore went public, Xstrata would have a much better idea about how the market valued Glencore.

Mr. Glasenberg ultimately decided the benefits of a public listing outweighed the risks, giving Glencore the firepower to make an offer for Xstrata.

In February 2012, the companies said they were in discussions for an all-share merger of equals. Mr. Davis would be CEO and Mr. Glasenberg would serve as his deputy, according to plans announced at the time. The mining giant created by the tie-up would be a powerhouse in coal and copper, which accounted for about 70% of Xstrata’s mining assets.

The deal would involve merging two different cultures: the gun-slinging traders of Glencore and nuts-and-bolts mining engineers and geologists of Xstrata.

Tensions emerged almost immediately, including between Messrs. Glasenberg and Davis. At a meeting between top officials soon after the deal was announced, Mr. Glasenberg said Glencore traders were irreplaceable “entrepreneurs,” according to people familiar with the meeting. Some in the meeting took that to mean that Xstrata corporate managers could be easily replaced, one of the people said.

In June, a big investor in Xstrata, Qatar Holding LLC, balked at the terms Glencore offered and demanded more. Mr. Glasenberg eventually agreed to sweeten the deal.

There was one caveat: Mr. Glasenberg would take the top spot at the company, not Mr. Davis.

Mr. Davis left the company and launched a private-equity fund called X2 Resources. Other Xstrata executives also left.

In the two years after the Xstrata deal, two of the biggest assets Glencore bet on with the purchase turned downward sharply—coal by 41%, copper by 30%.

Investors began to focus on a different legacy of the deal: debt. Glencore took on Xstrata’s $15 billion in debt, and by 2015, it carried nearly $30 billion in net debt—far more than competitors—and almost $20 billion in revolving credit lines it used to buy and sell commodities.

A natural-resource fund managed by J.P. Morgan Chase & Co. unloaded 2.3 million shares of Glencore in this year’s second quarter, partly because of worries about its high debt load, according to a person familiar with the investment.

Carmignac Gestion Group, a French asset manager that until last year was one of Glencore’s biggest bondholders, sold most of its Glencore bonds and stock because of fears about Glencore’s debt and the impact of slowing Chinese growth on commodity prices.

“We feel the combination of operational and financial leverage remains too high in the current environment,” said Carmignac analyst Simon Lovat.

The worries about Glencore accelerated after the company in August reported lackluster first-half results. With the sharp slide in earnings, investors and analysts started to worry that Glencore’s debt load was too steep.

If ratings firms slashed ratings on Glencore’s debt, pushing it into junk territory, it could cripple the firm’s credit-fueled trading operation.

Mr. Glasenberg and a team of Glencore financiers have been trying to allay fears. This summer, they traveled to the U.S. to meet investors and hedge funds. They learned some investors had serious concerns. If copper, one of the firm’s most important commodities, declined further, Glencore’s earnings would be too low in relation to its current debt level, according to a person familiar with the meetings.

The message: Glencore needed to slash its debt, right away.

Glencore executives say they believed they had the right level of debt and earnings, and they doubted copper would lose much more ground. But they agreed to appease investors.

After an initial rally, though, the stock continued to slump. Rumors about big trading losses and trouble with creditors spread through trading floors. The stock’s lightning-fast decline Monday shocked investors world-wide and raised fears of knock-on effects throughout commodity and financial markets. Glencore executives tried to reassure investors all was well.

Even amid the turmoil, Mr. Glasenberg has been pondering his next big deal.

Glencore in recent weeks has been in talks to bid for about $3 billion in coal assets owned by Rio Tinto in Australia, according to people familiar with the talks.

Also interested in the coal assets: Mr. Davis of X2.

The Wall Street Journal



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