A first set of combined annual results on Tuesday, which included flat underlying earnings of $13bn despite falling prices for most commodities and $2.4bn of synergies, showed the resources group starting to deliver – though mining remains a long way below its supercycle peak.
When Glencore’s planned merger with Xstrata looked set to founder in 2012, Mr Glasenberg re-engineered the deal into a takeover with himself as chief executive. That deal followed Glencore’s initial public offering in 2011, which turned Mr Glasenberg and other partners into paper billionaires.
The mining cycle has since cooled leaving investors who have held Glencore shares since the IPO nursing losses, while $7.5bn of writedowns on Xstrata’s assets post-takeover suggest Glencore overpaid. But Mr Glasenberg says the deal created a more “balanced” group, with more commodities to push into Glencore’s trading operations. The group is the world’s largest miner of zinc and export thermal coal and holds top five positions in other commodities including copper.
Mr Glasenberg relishes the fact that other miners such as Rio Tinto and BHP Billiton are heeding his advice in abandoning some of the expansionary projects that marked the peak of the commodities boom. But his company can still be defined by how much it differs from its peers.
Glencore’s old partnership structure remains a big part of its identity, with Mr Glasenberg and other top-tier managers still owning about a quarter of the company. Hardly any top Xstrata executives have been kept on after the takeover.
Glencore’s marketing business, which sources, ships and trades commodities, remains another obvious point of difference with most mining rivals.
When Glencore floated, many institutional investors were wary of what was regarded by some as a black box trading operation run by the ‘smartest guys in the room.’
But after three years of solid results from the marketing arm, attitudes are starting to change, say analysts.
“Shareholders are much more relaxed on marketing now because they can see it does generate value. They don’t mind it. It is a point of strategic difference,” says Paul Gait, analyst at Bernstein Research.
Indeed, 2013 was another resilient year for the marketing business. Aided by increased volumes from the acquisitions of Xstrata and Viterra, a Canadian grain company, the division delivered earnings before interest of $2.35bn, up 11 per cent on the previous year. From 2014, Glencore expects EBIT from the marketing arm of between $2.7bn and $3.7bn a year, up from previous guidance of $2bn-$3bn.
“They have spent a lot of time explaining to investors what the marketing business does,” says George Cheveley, natural resources portfolio manager at Investec Asset Management. “It’s mainly trading in the physical sense of warehousing and arbitraging location and quality differentials as opposed to just taking market risk and punting on prices.”
Glencore’s approach to mining is also substantially different. Peers such as Rio Tinto and BHP want mines to be “tier one” – industry shorthand for a project rich enough in resources to be mined for decades at low cost. It also normally means trusting their own expertise to build such mines.
In Mr Glasenberg’s words, Glencore is “scared like hell” about building mines from scratch. He sees more value in buying cheap assets and running them harder, and is much less choosy about where in the world he invests.
“We like to run our mines as cost centres,” said Mr Glasenberg on Tuesday, saying mine managers’ only concern should be to get products to the gate as cheaply as possible “and then the trader takes over”.
One company watcher says Glencore’s copper business in central Africa – where BHP does not venture – “is able to convert grade into dollars”.
Measured by returns on equity, Glencore’s model of relatively modest brownfield investments is sensible, says one analyst. “But the question on the table is whether in five years’ time . . . the capital needed to sustain the asset is higher and whether the unit cost of operating ever comes down.”
While Mr Glasenberg likes to talk about Glencore’s diverse mining portfolio the company is also highly geared to two commodities – copper and thermal coal – both of which fell last year.
“This is really a coal and copper company,” says Mr Gait. ”That’s the fundamental driver of earnings.”
For example, a 10 per cent fall in copper, which some analysts expect, would knock $1.2bn off operating earnings. A similar move in thermal coal, which is used in power generation, would cut earnings by $1bn. To put that figure in perspective, Glencore’s industrial, or mining, assets reported earnings before interest of just over $5bn in 2013.
Glencore, unsurprisingly, remains positive on the outlook for both commodities.
Most analysts think Glencore will sell Las Bambas, a Peru copper mine project due to start producing next year. Mr Glasenberg confirmed on Tuesday that China’s Minmetals group is the preferred bidder and has completed due diligence, but still hinted he would keep the asset if price expectations are not met.
“Now it’s just a price discussion. They [Minmetals] have seen the asset,” he said. “We believe that we have de-risked a large amount of the project . . . We have got a lot more comfortable with the asset.”
After lambasting his rivals for overspending and swamping the industry with new supply, which pushed down prices, Mr Glasenberg could fall behind BHP and Rio in returning capital to shareholders if he decides to keep Las Bambas.
Tuesday’s results showed Glencore’s operating cash flow of $10.4bn in 2013 did not cover capital expenditure of $12.8bn. The company also paid out $2.2bn in dividends.
“A sale of Las Bambas would be an inflection point and could allow them to return capital in a special dividend. You can argue that Rio and BHP are more advanced in deleveraging,” says Chris LaFemina, analyst at Jefferies.
Whether or not Mr Glasenberg is beaten to the punch, he believes the industry, which has slashed costs and cut spending over the past 18 months, is in now much better shape.
“The change has occurred and everyone is talking about a reduction of capex and reduction of new expansion,” Mr Glasenberg said on Tuesday, “And if we all believe what the mining companies are saying, there ain’t going to be big new supply kicked into the market and if the demand is there it should bode well for pricing.”
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