Glencore share price rebounds 10 percent as Citi rates ‘buy’

on Sep 29, 2015
Updated: Jun 1, 2022
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Glencore Plc (LON:GLEN) surged some 10 percent in morning trade in London today, following a near-30 percent slump on Monday, as Citigroup said that the Swiss commodities firm is oversold and rated it as a ‘buy’.

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The mining and commodities trading company plummeted on Monday after Investec warned that Glencore’s equity value would evaporate, if depressed commodities prices were to persist.
“Miners grew hugely to meet the demand from China and they borrowed heavily to find it and the cost of servicing that debt and the schedule of repayments are really putting companies such as Glencore under the spotlight,” said Laura Lambie, Senior Investment Director at Investec.

“The risk is if commodities don’t recover then companies like Glencore will be in trouble trying to repay its debt.”
Glencore had some $30 billion (£19.8 billion) in net debt as of July. In comparison, the company’s current market valuation stands at about £14 billion.
However, Citi argued that Glencore does not have a stressed balance sheet, with “more than $12 billion in liquidity, including $6.5 billion of cash after the recent equity placing”. This capital cushion allows the firm to stay away from debt markets until at least 2017, Citi said.
The US investment bank also noted that Glencore could raise as much as $12 billion from the sale of its grains trading business. Citi is a co-broker of the sale and said that “the level of interest is likely to be high”. In contrast, Investec questioned how much Glencore could raise from the sale, as “valuing such a volatile business is likely to be tough”.
Furthermore, Citi argued that even if copper drops a further 20 percent, Glencore would post pre-tax earnings of about $7.5 billion, whereas Investec had cautioned that current metals prices would deplete almost all investor value.
A downgrade of Glencore’s credit rating to sub-investment standard is unlikely, Citigroup said. And should a downgrade happen, Glencore’s counter parties probably would not stop trading with the company, it said.
Ultimately, Citi argued that if “the equity market continues to express its unwillingness to value the business fairly”, Glencore’s management should simply take the company private, allowing for easy and quick restructuring.
Citi was not the only brokerage to voice support for Glencore following yesterday’s debacle. Bernstein said that there is genuine economic value in the Swiss company, and rated the business as ‘outperform’.
“Even if we assume that the industrial assets continue to produce spot EBITDA margins (at spot commodity prices which are particularly depressed at present, with margins of only around 15%), and no contribution from the marketing business, we still see 93p of value. And this assumes that commodity prices never recover from their currently depressed state!”
Glencore’s share price had climbed 8.13 percent to 74.20p as of 10:43 BST today, though earlier in the session shares had added as much as 10.2 percent. The firm’s stock sank 29.4 percent on Monday and is 75 percent in the red in the year-to-date.
As of 11:01 BST, Tuesday, 29 September, Glencore Xstrata PLC share price is 74.39p.
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