[miningmx.com] – SHORTLY after Glencore announced it planned to list on the London Stock Exchange, analysts began grappling with how the group’s trading division operated, and the problems this posed to valuation.
Everyone was certain the marketing division was a differentiator, and a value creator, but how did it work, and what was it worth? “How you value Glencore is a mystery. It’s one big black box with the exception of the mining assets,’ one UK analyst told Miningmx as far back as September, 2011.
It would appear uncertainty about Glencore’s trading division was never fully addressed because fears over the debt it needs to operate was at root of the group’s spectacular 30% share slide this week – most of which has been recovered.
The share price weakness was in no small part arrested by Glencore’s management which took the unusual step of putting a number of misconceptions to bed, according to a report by Barclays Capital.
One of the misconceptions of Glencore’s trading division is that it needs an investment grade credit rating to operate. High debt on its balance sheet and falling commodity prices may, therefore, hurt the rating.
But most trading companies have lower credit ratings than Glencore with the cost of debt passed through to customers, said Barclays. The current low rate of interest means passing on the cost is minimal.
The other misconception surrounded the division’s credit and counter-party risk which Barclays said was allayed by some $50bn of bank guaranteed letters of credit that Glencore’s division possesses.
Barclays also noted that efforts by Glencore to reduce net debt $10bn was on track, an effort that has included a $2.5bn equity sale, suspension of the dividend, as well as asset sales that could extend to its entire agriculture trading business.
So is Glencore at risk of default? “Our credit colleagues believe this is premature and do not have those concerns – they do not think Glencore is at risk of imminent default,” said Barclays.
“The company has $6.5-7bn cash today and $7.4bn undrawn facilities (>$13bn of liquidity). Management has reiterated that it has no financial covenants, no material adverse change clauses and no high yield rating triggers in its credit facilities.”
