Glencore $25bn debt target draws cautious praise

[miningmx.com] – ANALYSTS welcomed Glencore’s copper and zinc production cuts, and efforts to reduce net debt to $25bn by the year-end, but they also sounded a note of caution saying the efforts had to be sustainable.

The Swiss-headquartered group announced in its third quarter production results today that it hoped to take net debt down some $5bn partly achieved through asset sales that included a $900m cash streaming deal on silver output.

Glencore said it had sold a share in future silver output from its Peru-based Antamina mine to Silver Wheaton Corporation for $900m. In return, Silver Wheaton will receive 140 million ounces of silver and pay 20% of the spot price.

Goldman Sachs said in a report that notwithstanding the progress made on reducing gearing on the balance sheet “… investors will be more interested in how much of the net debt reduction measures are sustainable” through operational cash flows.

Whilst the delivery of debt reduction was positive, “… more action could be required a year hence if the outlook remains equally bleak,” said Investec Securities which added that a sale of part or all of Glencore’s agribusiness division would be viewed positively.

“We think concerns over marketing and industrial earnings are overdone and net debt should fall rapidly through operating cash flows and divestments,” said Credit Suisse.

Shares in Glencore have been under pressure, along with nearly every other mining stock, all year, but on September 28 the stock was savaged by short traders. It shed about 30% on fears the company would become insolvent.

Glencore subsequently fought a rear-guard action telling investors it had no covenants on its debt that would force ‘a run’ on its balance sheet. However, it promised to kill up to $10bn in net debt, from a peak of $30bn.

In its third quarter review, Glencore said it had repaid three bonds totalling $1.95bn, two of which had fallen due. It had also repurchased $400m in 2016 and 2017 bonds as the company’s share price was relatively cheap.

Glencore lowered production guidance for most of the important minerals it mined including copper, zinc and lead. Copper would be lowered by 455,000 tonnes which was more than the 400,000 tonnes a year reduction it previously identified.

Coal production guidance was reduced by two million tonnes (mt) to between 133mt and 137mt from 135m to 139mt.

“This was as good a denouement to the end of very volatile quarter as one could realistically expect,” said Barclays Capital.