Glencore rehabilitation complete as unveils $1bn dividend

GLENCORE gave notice of its rehabilitation following a tumultuous 2015/16 saying it would pay a dividend of $1bn in two halves during its 2017 financial year.

The payout surprised the market. “This is a positive development as we believe investors were not expecting a dividend reinstatement announcement with today’s presentation [investor update],” said Goldman Sachs in a morning note.

Glencore also unveiled plans for a new distribution policy which would take effect in its 2018 financial year the basis of which was a fixed $1bn distribution from its marketing division supplemented with a 25% payout from its mining assets.

Steve Kalmin, CFO of Glencore, said in a conference call that there was “potentially scope” to increase both the 2017 and 2018 dividend payments provided it first restored its BBB/Baa credit rating.

“If there is no sensible alternative [in terms of production expansion or merger and acquisition activity] then it is entirely conceivable that we could distribute 100% [of free cash flow],” said Kalmin of the group’s 2018 prospects.

The reinstalled dividend signals the close of Glencore’s self-help measures in which it is set to reduce net debt to between $16.5bn to $17.5bn having sold $6.3bn in assets – far in excess of the original $1bn to $2bn sell off ambition.

It also announced today a new offer to buy back bonds of up to $1bn which follows an October announcement that it would buy back bonds maturing in 2018 and 2019 totalling some $1.25bn.

Looking further afield, Glencore said was targeting maximum net debt level of two times earnings before interest, tax, depreciation and amortisastion (EBITDA) “through the cycle”.

The payout is predicated on strong anticipated cash flows which even at the commodity price lows experienced in the first quarter of this calendar year were strong on an annualised basis.

For illustrative purposes Glencore said that free cash flow of about $6.5bn would flow from EBITDA of $14bn assuming forecast calendar 2017 prices. Marketing earnings before interest and tax would be in the upper end of guidance at $2.5bn to $2.7bn, the group said.

“Last year we announced a programme of measures to reduce our debt and structurally increase the flexibility and strength of our balance sheet. We have delivered on our commitments and done so in a way that has preserved the long-term earnings capability of the group,” said Ivan Glasenberg, CEO of Glencore.

“Glencore can look forward to the future with confidence, based on our scaleable and low cost industrial operations and robust marketing business,” he said.

Commenting on the resumption of the dividend and new dividend policy from 2018, JP Morgan Cazenove said it reflected “an admirably well executed debt reduction strategy across 2017.

“This dividend policy is equivalent to a yield of 2% in 2017 and 3.2% in 2018,” it said. “These metrics in our view confirm Glencore is strategically well positioned and are testament to an admirably well executed debt reduction strategy across 2017,” the bank said.

James Oberholzer, an analyst for Macquarie Bank observed that the variable distribution from Glencore’s mining or industrial assets could support an additional payout of $1bn in 2018 “… which would imply a potential doubling of the dividend in 2018”.

PRODUCTION

Glasenberg said the group would continue to keep its options open regarding restarting idled production. “We can bring back latent capacity but only at the right time when new tonnage won’t have a negative effect on the market,” he said.

‘New’ production would come in the form of copper output at Katanga in the Congo where commissioning of the mine was scheduled for the end of 2017 with first metal to hit the market in 2018. Copper from Mopani in Zambia would come on line by late 2018 following commissioning of new shafts and a concentrator.

The restart of idled zinc capacity remained “dependent on market conditions”, said Glencore in its investor presentation notes, but when asked for further details, Glasenberg said: “If you accept 2% demand growth you’ve got to wonder where the new production is going to come from”.

Several important zinc mines have left in the market in the past 18 months including the Century mine, as well as Vedanta’s Lisheen operation. Glencore will produce 90,000 tonnes more zinc than previously guided for 2017 from its Alumbrera mine.

Other changes to previous production guidance includes 65,000 tonnes less copper owing partly to lower output at Alumbrera which is reaching the end of its mine life.

There would be 10 million tonnes more coal production than guided for the year.

Glencore hedged 55 million tonnes of coal in the first half of its year which Glasenberg acknowledged today was perhaps “a bit high” but was designed to provide downside protection, a decision taken at the time.

As of its mid-year, the mark to market value of this hedge was a negative $395m but as the hedge stands today there’s only 11 million tonnes more to deliver. Kalmin said the company had accelerated deliveries into the hedge which had a current mark to market value of negative $200m.