Glencore: in a deep hole

Glencore's heavy debt load and the low price of metals have sent investors in the commodities trader running for the door.

15-10-1-Glencore-634

Investors are fleeing the commodities giant

Shares in mining and commodities trading giant Glencore plunged by 30% last Monday. The slump was due to more poor Chinese data and a note from Investec saying Glencore's equity could be worthless if metals prices stay low. The main worry is the group's massive debt load of $30bn. Scepticism over its ability to cope with this debt is growing. The price of insuring Glencore's debt against default has jumped to the highest level since the global crisis in 2009.

On Tuesday, Glencore said it remained "operationally robust" and had access to "strong lines of credit". Citigroup said the company looked undervalued and should consider going private if the stockmarket failed to value it fairly. The shares bounced but remain around 80% below their 2011 flotation price.

What the commentators said

One major problem, as Jim Armitage pointed out in The Independent, is that "nobody knows when, if, or by how much, demand for Glencore's products will return". Its own forecasts havebeen too bullish in recent years. There are also recurrent questions about what is happening at its commodities trading division, an "inherently opaque" business. It says its debt-funded positions are all hedged and its balance sheet can cope, but "there are niggling doubts".

So what next? "One has to admire the chutzpah" Citigroup has displayed with its suggestion that Glencore go private, said Nils Pratley in The Guardian. Investment banks have done extremely well out of it ever since its overpriced floatation. The recent share placing, which Citigroup helped set up at 125p, was just the latest bonanza.

Now Citigroup is lining itself up for more fees from a buyout, and is even floating the idea of another flotation a few years down the track. How absurd. The last thing this overleveraged company needs is "another layer of buyout debt". Instead, it should be selling some assets "at half-decent prices" to get its debts down.

Recommended

How to invest in gold
Gold

How to invest in gold

Gold can be a good way to diversify your investments and help during difficult markets. We look at how to get started with the precious metal.
26 Jan 2023
The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves takes a look at the companies with the highest dividend yields in the UK’s blue-chip index
23 Jan 2023
The top ten dividend stocks in the FTSE 250
Share tips

The top ten dividend stocks in the FTSE 250

The average FTSE 250 dividend yield is around 4%, but many stocks yield much more. Rupert Hargreaves picks the best FTSE 250 stocks for income investo…
17 Jan 2023
The top funds to invest in
Funds

The top funds to invest in

As market volatility and recessionary fears continue, here are the most popular funds, stocks and trusts investors are putting their money into accord…
5 Jan 2023

Most Popular

Council tax increases 2023 – how much more will you pay?
Tax

Council tax increases 2023 – how much more will you pay?

Your council tax bill will go up in April - we reveal the councils that have confirmed what this year’s increase will be.
23 Jan 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
27 Jan 2023
Share tips of the week - 27 January 2023
Investments

Share tips of the week - 27 January 2023

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages
27 Jan 2023