Is Glencore Sitting on Copper or TNT?

Is Glencore Sitting on Copper or TNT?

Panic begins to grip the market, but Glasenberg is muscling in on new assets…

The market is losing confidence in Glencore. On rising volume, its shares have fallen 45 per cent this year, touching a record low on Wednesday of £1.59, as investors increasingly fret over its gross debt load of $50bn.

Earnings are falling faster than debt and the profitability of its trading business depends on maintaining low borrowing rates. Glencore also announced the sale of three non-core assets last week for $290m, fueling fears that it is entering a vortex of downgrades, dividend cuts and mine sales at the bottom of the market. “The first thing to go will be the dividend,” according to analysts at Liberum in London, “then assets, then the credit rating.”

Even more alarmist is a theory by JP Morgan that as Glencore lowers leverage by unwinding its trading book, it will unleash a $16bn wave of metal onto the market. “If Glencore went down it could be to industry as Lehman Bros. was to finance,” broker SP Angel told clients this week.

Marked TNT

A four-year view gives a very different perspective.

Recent figures published by the London Metal Exchange show that Pacorini Metals, Glencore’s warehousing business, stores a whopping 56 per cent of the world’s registered metal.

The market has taken Glencore’s plunging share price as proof that it has no better view of metal dynamics than its peers across the industry. The company is “the puppet” of free markets, wrote the Financial Times this week, “just like everyone else.” It is a “misshapen giant”, according to London’s Evening Standard, “a big wooden box marked TNT.”

There is an alternate reading. Glencore’s share price suggests it is little more than a leveraged play on copper, the biggest source of profit for its giant mining division. And the company’s board listed the business in May 2011 at the highest ever point in the copper price.

“The timing of their IPO shows they’re not bad at reading these things,” one fund manager says. “The key is to watch what Glencore is doing, not what others are saying.”

Copper & Zinc

Copper has halved since Glencore’s IPO in 2011, touching a 6-year low on Wednesday, down 19 per cent in 2015.

Glencore’s guidance this week shows the group is planning flat or falling production in almost every commodity, including oil, ferrochrome, nickel and coal. But in copper and zinc, it is increasing output by between 5 and 15 per cent in the second half of this year.

Whilst Glencore has been selling greenfield copper assets, such as the undeveloped Tampakan project in the Philippines, a string of bit-part deals show that chief executive Ivan Glasenberg is looking through the current downturn and taking a bullish view on base metals, bulking-up on the off-take deals and brownfield assets he has always preferred.

Glencore struck a three-year off-take agreement with nickel player Sirius on Tuesday and tightened the terms of a debt deal it holds over copper junior PolyMet Mining in July. It has also issued a default notice to Australia’s Aurelia Metals, potentially gaining control of its Hera zinc-gold mine in New South Wales.

They are low-cost deals, out of the media spotlight, but it is exactly the type of hustling corporate behaviour that has grown Glencore’s mining business into one of the world’s largest.

“I’m very happy with getting tier- two or tier-three assets, putting them together,” Glasenberg is quoted as saying. “If something comes cheap enough, we’re all about return on equity.”

Duelling Opinion

Aurelia’s underground Hera mine entered production in April, but its shares have sunk 86 per cent since Glencore notified the company in June that it has defaulted on its loan notes, totalling A$117m ($86m). “It comes down to duelling legal opinion,” Aurelia’s managing director said. “We can only rely on our advice and the advice has been fairly strong.”

Hera boasts a neighbouring high-grade copper discovery, including an 8.1 million tonne copper resource that remains open at depth. The deposit has been likened to the nearby Cobar copper mine, already owned by Glencore, which reopened the operation in 1999.

Talks between Glencore and Aurelia are ongoing, with a financing deadline on Monday, but prior settlements suggest that Glencore’s investors are in line to absorb the asset.

Zug-based Glencore swallowed the high-grade Bracemac-McLeod zinc mine in Quebec in 2013, just as it entered production, after joint-venture partner Donner Metals, which spent seven years developing the asset, fell behind on its working capital commitments. It also bought Blackthorn Resources out of its Perkoa zinc mine in Burkina Faso last year, after Blackthorn failed to keep-up with Glencore’s spending plans.

Buyer’s Market

Glencore has previously been criticised by BHP Billiton’s former chief executive Marius Kloppers for never building its own mines.

“That’s great,” Glasenberg responded. “Who [on earth] wants to build an asset if I can buy them cheaper than you can build them.”

Midtier copper miners are meanwhile beginning to trade below the cost of their sunk capital. Toronto- listed HudBay Minerals for example has halved since early May, dropping its market capitalisation below the $1.7bn build-cost of its giant Constancia copper mine in Peru. By Glasenberg’s own rulebook, it is a buyer’s market.

Glencore’s manoeuvrings in base metals, upping production and boxing-in future assets, show that whilst the market is panicking, for Glencore, it is business as usual. But its moves are not yet decisive enough to suggest Glasenberg is calling a bottom for copper, or his own share price.

The market will not ring a bell when it bottoms. But after the “sell” signal of its IPO in 2011, a substantial, cash-flowing, bolt-on deal in base metals, well below an asset’s cost of construction, would be the starkest reminder Glencore could send that it is sitting on copper, not TNT.

Co-published by Global Mining Observer (www.globalminingobserver.com)