[miningmx.com] – JIM Rutherford, a non-executive director of Anglo American and former fund manager, backed Ivan Glasenberg‘s Glencore to return to its former strength after a pummelling by investors over its indebtedness.
“Ivan is a very strong character and he will bounce back,” said Rutherford who was delivering a key note address at the Joburg Indaba, a mining conference.
Shares in Glencore were down about 30% after one day’s trade on September 22 following a report by Investec Securities which said the Swiss-headquartered group was at risk of wiping out the value of its equity because all cash would be pumped into serving debt.
Glencore had said earlier that month that after consultation with shareholders, it had decided to cut net debt as much as $10bn to about $20bn. It had earlier expressed comfort which its net debt but Rutherford said market perception was everything.
“They [Glencore] have a very strong business. But it is the issue of perception that matters. If the market thinks there is a problem, that’s what matters,” he said.
Glencore has since embarked on a sales programme, has cut the dividend, and raised $2.5bn in equity to tackle the problem. Glasenberg has said the company was not in danger of bankruptcy – a view the market is eventually accepting.
“While the leverage is clearly of concern it is not anywhere near an immediate existential threat to the company – it is an issue that needs to be managed, and that is exactly what the company is doing,” Paul Gait, an analyst at Bernstein told Bloomberg News on October 5.
Rutherford said that the mining sector’s current ills, which has seen total net debt in the sector increase to $213bn between 2011 and 2014 from $4bn in the years 2007 – 2010, was related to a misallocation of capital; cash flow in the sector was not the problem.
Speakers at the Joburg Indaba sought to explain why the misallocation occurred suggesting that either mining company boards were not strong enough, or that mining companies were led by engineers rather than business people.
“Every dollar the industry earned, it spent and was ramping up dividends and buy-backs,” said Rutherford.
“The outcome was ballooning levels of debt between 2010 and 2014. It starts to explain some of the things happening now including Glencore’s fund-raising,” he said.
