Glencore’s share price has more than doubled since hitting lows of 67p at the end of last month. The strength of the rebound has all the hallmarks of a short squeeze, when hedge funds who have been selling the stock, including Lansdowne Partners in London and Passport Capital in San Francisco, are forced to reverse their positions to book a profit.
The rally however has petered out in recent days, suggesting the short squeeze has largely worked its way through, once again turning attention to downside factors that could massively sway Glencore’s stock. Here are four of them to watch:
Glencore increased its copper and zinc production at the time of its first-half results in August, but investor pressure has forced the company to pull an about-turn, idling its higher cost copper mines in Zambia and the Congo. It also announced plans to slash its zinc output by 500,000 tonnes, equal to a third of its zinc production, in an announcement to the stock exchange yesterday evening.
The impact of the production cuts will already have been plugged into analyst spreadsheets and earnings figures, as well as the market’s expectations. But what could catch shares off-guard is if Glencore’s accountants, in the wake of its production cuts, are forced to impair the carrying value of its base metals mines on the company’s heavily debt-laden balance sheet. Big impairments are something to watch out for.
The Copper Price
Glencore’s future increasingly appears to be riding on the short-term copper price. Many of its mines, such as Collahuasi in Chile and Antamina in Peru, are ultra low-cost and have multi-decade mine lives. But a plunging copper price in the coming weeks and months would hit cash flow and could trigger a round of credit rating downgrades in the US, by Moody’s and Standard & Poor’s.
In turn, that would increase the cost of Glencore’s borrowing, totalling $50 billion, potentially feeding through into further analyst downgrades, creating a vicious circle for the company’s share price. All eyes should be on the copper price between now and the end of the year and ominously, analysts at Barclays are bearish.
Glencore recently entered a fresh round of asset sales, so as to bolster its balance sheet, with disposals focused on its agricultural business and gold and silver by-product from its base metals mines. The total figure it has guided for disposals is only $2 billion, but according to reports in Reuters, if Glencore finds the right buyer, it may look to sell its entire agricultural division, with deal figures touted as high as $10 billion to $12 billion.
The estimates have been a key driver behind Glencore’s share price rally, suggesting the higher figures may now be baked-in to expectations, so any disappointment to the downside and shares could well go reeling. Bullishness in the forecasts and as a result, Glencore’s stock, has created ample room for surprise to the downside.
Goldman Sachs knows the odd thing about complex trading businesses, which is the beating heart within Glencore. The bank’s famously bold market calls also have the power to sway market sentiment. At the end of September it warned that Glencore’s credit-rating was at risk of being downgraded to junk status, if copper faces further downside, sending Glencore’s shares tumbling on the day of the call, down 9 per cent.
In the research note however, Goldman maintained a “neutral” overall position on Glencore, meaning its analysts expects the company to perform in line with the wider sector. If it changes that view and downgrades the rating to a “sell”, it could trigger alarm amongst buyers, especially in the US. As ever, Goldman’s verdict will be the one to watch.