Glencore gives trading details as share price falls

Commodities group seeks to reassure on debt

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Glencore has revealed key details of its trading operations and told investors its plans to cut its debt are on track in an effort to reassure traders nervous about the impact of falling commodity prices.

Shares in the UK-listed miner and trader were down 3 per cent at lunchtime on Thursday, adding to the group’s woes. The stock price plunged nearly 30 per cent on Monday after an analysts’ note suggested Glencore’s equity could be wiped out if commodity prices did not recover. Traders have also started pricing its debt, which is investment grade, as if it were riskier junk bonds.

Glencore is the worst performing stock in the FTSE 100 this year, bearing the brunt of investor concerns over an economic slowdown in China that would further depress demand for commodities.

While other mining stocks have been hit, Glencore has been under particular pressure because of its high levels of debt, partly the legacy of its acquisition of Xstrata two years ago.

Under pressure from investors Glencore responded last month with a $2.5bn equity raise as part of a $10bn debt reduction plan.

Since Glencore floated, its “marketing” or trading arm has been regarded by many investors as black box trading operation run by the people who liked to think of themselves as the “smartest guys in the room”.

Analysts have struggled to forecast profits for the business because Glencore discloses very little, arguing that more information would empower private rivals such as Trafigura and Vitol.

In a meeting with investors this week Glencore gave more details on a part of its balance sheet that has been under scrutiny — its $17bn of inventories that are used for its trading and marketing operations.

Glencore does not include these inventories to its own definition of its group net debt, which it puts at $30bn as of the end of June. However, credit rating agencies and some investors do count the inventories towards the group’s overall debt, affecting their view of its creditworthiness.

Glencore gave more details of the inventories to support its view that they could be quickly liquidated if needed, saying that about two-thirds, or $12bn, related to oil and had a trading cycle of only eight days.

Glencore’s metals business, which has a much longer 40-day trading cycle, makes up a smaller proportion of the inventories.

As part of its debt reduction efforts, Glencore plans to cut some of its less profitable trading activity, which it says will allow it to cut a large amount of working capital relative to a small hit to operating profits.

In the investor meeting — which was hosted by Barclays, a bank that was among those working on Glencore’s recent equity raise — the commodities house also said its marketing inventories carried minimal price risk, with almost all being either sold forward or hedged as of the end of June.

Most trades were hedged on exchanges, Glencore said, according to Barclays’ account of the investor meeting. About 3 per cent of trading — involving more esoteric metals such as vanadium, where there is no liquid forward or futures market — could not be hedged.

Shares in the company remain more than 20 per cent under the level at which Ivan Glasenberg, chief executive, other executives and investors backed the $2.5bn equity raise last month.

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