Glencore is in debt reduction overdrive

Boss Ivan Glasenberg will help underwrite an equity issuance as part of a $10.2bn debt reduction scheme.

by Adam Gale
Last Updated: 05 Oct 2015

Swollen net debt is clearly not en vogue in corporate finance right now. While Tesco found £4bn today to shore up its balance sheet, mining giant Glencore has announced it’s looking for a colossal $10.2bn (£6.7bn) debt reduction.

That represents a hefty chunk of Glencore’s $29.5bn net debt, which has caused concern among investors and a recent warning from ratings agency Standard and Poor that its outlook is now negative.

Glencore hopes to save $2.4bn by suspending dividends this year and next, $2bn from the sale of assets including its agribusiness stake, $500-$800m  from cutting long term loans and advances made by the firm and a combined $2-2.5bn from the reduction of working capital and industrial capital expenditure by the end of 2016.

The rest will be raised by a $2.5bn issuance of shares, 78% of which will be underwritten by Citigroup and Morgan Stanley. The other 22% will be provided by senior management, led by 8% shareholder and CEO Ivan Glasenberg.

He was unsurprisingly upbeat. ‘We remain very positive on the long-term outlook for our business and this is reinforced by senior management's commitment to take up 22 per cent of the proposed equity issuance,’ Glasenberg said in a joint statement with CFO Steven Kalmin.

Cheered perhaps by the fact that the firm’s bosses are putting their money where their mouths are, investors lifted the share price 6% by lunchtime in London to 130.5p.

That’s a step in the right direction, but there’s still a way to go before the shares recover from their recent lows – the firm had lost 60% of its value since early May as a result of the commodities slump, before today's boost.

As bear markets go, this one’s an 800lb grizzly with a taste for blood. Demand in China, the biggest commodities consumer, has plummeted, contributing to Glencore’s recent first half net attributable loss of $676m.  So why, in the face of such hardship, is Glasenberg so positive?

‘Copper and zinc are both supply-challenged and an essential ingredient of future global growth,’ he said, while pointing out that ‘thermal coal's position and availability as the lowest cost fuel source for many large economies will underpin its key role in the global energy mix for many years to come.’

The storm may be heavy then, but it will pass. If Glasenberg were differently minded, he might perceive some sinister grey swans prowling those choppy waters, however. The extent of the economic slowdown in China remains to be seen, as does the impact of the impending Paris climate change conference on the coal industry.

For now, actions speak louder than words. Aside from cutting debt, Glencore’s also suspending operations at two large African copper mines for 18 months, while cost-saving upgrade works take place (taking 400,000 tonnes of the metal off the market in what it hopes will be a price-boosting move). The sector’s recovery is still clearly a way off, even if Glasenberg is right that it is probably inevitable.

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