What are you guys thinking about Glencore? I am by no means a stockpicker/equity researcher but when I look at some valuations (P/B 0,41) they seem pretty attractive. Cheap for a reason? Well, if commodity prices are going even lower yes. But who if not the big guys with economies of scale can operate in this environment? Or am I missing something?
I think, the combination of commodity prices and the debt burden is the issue. Some measures re reducing debt are already effective, and management tries to diversify via an Oil deal. Equity still seems too hot for me, we have Glencore bonds, and I hope that CDS will tighten in the near future!
I would buy the bonds. Overall, long term this company will be fine.
look at the board… tony hayward… what a genius that guy is…
glencore has a lot of properties in high political risk locales. as the commodity supercycle unwinds and many mines, even large, world-class ones become unprofitable, it will likely be difficult to avoid expropriation in some cases. i think this is the long-term risk with glencore. high debt and unreliable and potentially unsaleable properties. i’d rather own a higher cost mine in a low political risk country than a lower cost mine in a high political risk country at a time of budgetary strain in commodity producing countries.
Thanks all for your insight.
Matt, the political risk is a valid point.
By the way: my interest for GLEN came from the fact that a lot of analysts on Bloomberg still see a huge upside in Glencore. Average target price is 86% above current price.
Ignore P/B, a lot of those “assets” will be written off in the coming quarters.
Glencore is fine. The trading operation generates between a quarter and third of EBITDA and serves to support EBITDA’s downside against a downturn. The trading is non-directional and based on carry and transportation premiums and arbitrage. Expropriation is extremely unlikely given that the countries those assets exist in know they are unlikely to be able to operate those mines profitably without Glencore’s ongoing investment, even in the near term.
Re: Glencore bonds, a question for you experts: cash bonds, e.g. 5Y maturity, recovered faster and more sustainable than the CDS of the same maturity, which means that those cash bonds have a higher price than credit-linked notes that are priced via CDS.
My understanding is that delivery options in the CDS contract, limited short selling opportunities for bonds and that CDS mustn´t be funded can cause price discrepancies. Are there any other factors? Thx…
expropriation would be the extreme. zambia already altered royalty rates earlier this year and zambia and other countries will continue to feel budgetary pressure and target foreign investors, and miners in particular, to help fill the gaps. we have to remember that an inability to balance the budget in these countries often means regime change so sucking miners dry until the eventual day of reckoning is an obvious conclusion.
CDS market is also very illiquid so execution costs can be high and prices are often distorted on names with smaller amounts of debt oustanding. Not sure liquidity is as much of an issue for Glencore CDS though.
Yeah, but most of the rate hikes that were pushed out ended up being significantly rolled back as miners threatened to close or reduce output as well as cut CAPEX. Additionally, your premise that these actions are limited to fractured or threatened governments in conflict areas is way off base. In fact, the greatest concessions have come through established nations. Indonesia is a perfect case in point. Most of the Gresik smelter talk and threats over the export agreements have quietly faded with very minor concessions as the countries have a co-dependence with the fate of the miners. In this down market the miners have been quick to point to their own strain and make a strong case that they cannot sustain any significant price hikes and will be forced to cut production. Leaving, expropriation which would clearly be non-economical and the worst outcome for both parties. Other than that the miners have demonstrated an abilitiy to deal with small tax increases in those areas and it is truly a miner factor in the decision to invest in Glencore.
isn’t Glencore mostly hard assets now? How big is its trading operation that it’s able to withstand a downturn?
Well earlier I pointed out that the trading operation is between a quarter and one third of EBITDA. Obviously not enough to get by if mining EBITDA goes negative, but enough to dampen exposure to copper as opposed to a pureplay like FCX (I know 20% is O&G but that hasn’t been a source of stability lately). Also realize that TTM EBITDA was $9.6B and the first half prorated is about $9B. Their average cash copper cost is expected to run about $1.38 for 2016 at higher production levels than what they’re seeing currently, which allows substantial cash flows even at the current $2.07 copper. Add in the fact that TTM FCF was $5.1B and this firm has more than $11B in available and committed liquidity and significant remaining levers, particularly the Ag unit which is valued around $12B if sold. The ag unit provides a very crucial diversified bailout lever should mining continue to deteriorate.