SHARES in Glencore have responded strongly in the last 12 months, but analysts believe the company has still some way to go because the market hasn’t properly digested the enormity of its balance sheet restructuring.
“The deleveraging strategy that began in Autumn [Northern Hemipshere] 2015 has now been largely achieved and the company continues to deliver consistent guidance and good operational and cost control,” said Credit Suisse analyst, Liam Fitzpatrick in a note last week.
“We do not believe the reduction in debt levels and recovery in cash flows has been fully price in by the market, the business is well diversified, the copper outlook is improving and latent capacity growth in coper and zinc has the potential to expand group production volumes by about 20% by 2019 at very low capex,” he added. Glencore took net debt down about $10bn in 18 months to around $17bn to $16bn today.
Following Glencore’s production figures on February 2, Myles Allsop, an analyst for UBS, said that Glencore offered leverage to commoditities which have the best fundamental outlook “… and it should deliver material volume growth from latent capacity”.
The cash flow generation, breathing space on the balance sheet and improved outlook for commodities is also seeing Glencore capitalise on the organic or brownfields growth opportunities that the group’s CEO, Ivan Glasenberg, said he much prefers over riskier greenfields developments.
Take for instance this week’s bid for 100% of Mutanda Mines, and an increase to about 87% of its stake in Katanga Mines – a bet on the prospect for copper production from the Democratic Republic of Congo.
On the face of it, the Mutanda transaction – in which Glencore is taking out the 31% share owned by Dan Gertler’s Fleurette Group – is a $922m transaction, being the value placed on the asset by BMO Capital Markets.
In actual fact, given that Fleurette Group has loans with Glencore, the cash outlay is only $534m, an amount that also includes the Katanga shares. “This is the kind of transaction we prefer,” said Charles Watenphul, spokesman for Glencore.
Earlier this year, it unveiled its first so-called ‘bolt-on’ deal in which it said it would join its 9% shareholder Qatar Investment Authority (QIA) in a €10.5bn swoop for 19.5% of Russian oil company Rosneft.
Said Credit Suisse: “Given the deleveraging delivered through 2016, the company has returned to mergers and acquisitions and, if focused on minority deals and bolt-ons should be a relatively low risk way of driving future growth”.
