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.
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".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
-
Banks given additional 72 hours to investigate suspicious payments
New rules will allow banks to pause suspicious payments for longer, giving them time to investigate cases of potential fraud
By Katie Williams Published
-
What financial support can you get if you are suffering with long-term illness?
Health is wealth and more important than any material riches. But too often, long-term illness brings financial worries of its own. What financial support can you get if you are ill?
By Katie Williams Published
-
These 2 stocks are set to soar
Tips The returns from these two aluminium and tin stocks could be spectacular when the commodity cycle turns says David J Stevenson.
By David J Stevenson Published
-
A lesson for investors from a ill-fated silver mine
Analysis Mining methods may have changed since the industry’s early days, but the business hasn’t – digging ore from the ground and selling it at a profit. The trouble is, says Dominic Frisby, the scams haven't changed either.
By Dominic Frisby Published
-
The natural resources industry is in a tight spot – which is bad news for the rest of us
Opinion The natural resources industry is in a bind. We need it to produce more energy and metals, but it has been starved of investment, plagued by supply chain issues, and hobbled by red tape. That’s bad news for everyone, says Dominic Frisby.
By Dominic Frisby Published
-
How to invest in the copper boom
Tips The price of copper has slipped recently. But that’s temporary – the long-term outlook is very bullish, says Dominic Frisby. Here, he explains the best ways to invest in copper.
By Dominic Frisby Published
-
Why investors should consider adding Glencore to their portfolios
Tips Commodities giant Glencore is well placed to capitalise on rising commodity prices and supply chain disruption, says Rupert Hargreaves. Here’s why you should consider buying Glencore shares.
By Rupert Hargreaves Published
-
How to invest in the multi-decade boom in industrial metals
Tips The price of key industrial metals has already begun to rise. The renewable energy transition will take them higher, says David Stevenson. Here's how to profit.
By David Stevenson Published
-
Avoid China’s stockmarket – here’s what to invest in instead
Opinion China’s stockmarket is not a good place for investors to be. But you can't just ignore the world's second-largest economy, says Dominic Frisby. Here, he picks an alternative China play.
By Dominic Frisby Published
-
6 gold funds to buy to add exposure to the yellow metal
Gold Gold funds are one of the best ways of adding gold to your portfolio. We pick some of the best gold and gold-mining funds.
By Rupert Hargreaves Last updated