Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Glencore’s non-surprising surprising money raising

By Chris Bailey of Financial Orbit

7 September 2015 05:02

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Well, well, well. For me today’s number one most interesting UK regulatory news update was from Glencore (GLEN). Just nineteen short days ago after listening to the management of the FTSE-100 mining/commodity trading company confirm their faith in their balance sheet and general corporate approach, Glencore have unveiled a range of initiatives including a US$2.5bn of new equity issuance, the suspension of the dividend for at least the next year and various asset sales and mothballing actions to slash US$10bn from their net debt pile. Well I did warn at the above link that Glencore was ‘still too much of a full-on risk situation to get involved – and don’t believe that 9% dividend yield many data providers are highlighting at the moment…Enthusiasts for large cap mining investment should continue to prefer Randgold Resources (RRS)…or…BHP Billiton (BLT)…(companies) with a proper underpinned dividend and little debt’. For the one-line summary this remains my view.

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Comments

David Russell

7 September 2015, 07:07

Great article and I think they will raise the cash but will it be enough.?
alcira16247

7 September 2015, 07:35

Chris

Good call on this one!

Big red flag to me, on managements abilities to get through this companies present difficulties, that they’ve been forced into such a turn about face.

Operating with wafer thin margins within two of its main divisions and with horrendous debt levels, should the present downturn continue or even deepen and be more prolonged, than managements assumptions, could one make an argument that Glencore might not even be able to survive in its present form?
Chris Bailey

7 September 2015, 08:30

David, I think it will be enough in any scenario other than an overt China recession. Personally I don’t see that so I would not worry on that behalf. Of course I may be incorrect which is why when there are stronger balance sheet/IMO sustainable div heavy stocks in the sector they appeal more on a risk-reward basis.
Chris Bailey

7 September 2015, 08:53

Thanks Alcira16247.

As I noted in the article the role of shareholders in helping induce the about turn is kind of interesting and reflects – as you imply – the weak position of management as well as the crucifying power of debt. They will survive. I did a rough calculation in my first article about the value of the trading business and my back-of-the-envelope suggests that could cover their net debt. So the equity becomes very geared to the success or not of the more mining centred divisions where the assets are ok…but they are not Billiton for e.g. My view remains that the prudent investor leaves this to ‘the experts’ but doesn’t throw up their hands to the larger cap mining sector but rather considers a Billiton or a Randgold as a more sensible way to gain exposure to this depressed but still essential industry.