Glencore to reinstate dividend in 2017 as hammers net debt

GLENCORE said there was “every likelihood” it would reinstate the dividend next year after a 12-month operating and balance sheet restructuring it which it was “highly cash generative” at current spot prices and was set to meet its $5bn asset disposal target.

The group would canvass shareholder ideas on the structure of payouts in the next four to five months. Glencore CFO, Steve Kalmin, said that a dividend was preferred means of payout to shareholders rather than share buy-backs.

“It needs to be sensible and predictable, but we are all ears if some people have got good ideas,” he said on the format of the payout. “We would like to hear those over the next four months,” he added.

Glencore was targeting net debt of between $16.5bn and $17.5bn by the close of its financial year on December 31 – a reduction of up to $1.5bn more than it forecast at the beginning of its financial year – having delivered up to $5bn in asset sales. Net debt at the interim stage was $23.6bn which was better than the consensus estimate of $24.2bn.

Commenting in the group’s interim results, in which Glencore suffered a 13% decline in pretax earnings (EBITDA) to $4bn, CEO, Ivan Glasenberg, said net funding would also be reduced to between $31bn and $32bn.

He also said the group was “highly cash generative”, but he was cautious about prospects notwithstanding “… the more constructive tone of the markets” that had supported Glencore’s key commodities.

“While we are highly cash generative at current prices, we remain mindful that underlying markets continue to be volatile. We are alert to and have a high degree of proven flexibility in adapting to changing market conditions,” he said.

Funds from operations (FFO) in the six month period declined about a fifth to $2.8bn. However, capital expenditure was cut 51% to $1.6bn which had “comfortably” offset the reduced FFO. Glencore’s marketing division lifted pre-tax earnings 14% to $1.2bn “supported by strong contributions from metals and minerals”, it said.

In June, Glencore took asset disposals in the period to $3.9bn following an agreement to sell a further stake in its agribusiness for $624.9m. It had earmarked generating up to $5bn from asset sales this year.

It followed this up today with the sale of A$700m ($700m) sale of a 30% stake in its Ernest Henry copper mine to Evolution Mining which also includes the forward sale of gold credits from Glencore’s remaining 70% stake in the mine.

“We remain confident and focused on achieving even lower than previously indicated net funding and net debt levels by the end of this year,” said Glasenberg.

There was still the possibility the group would sell its Lomas Bayas copper mine in Chile, as well as the Vasilkovskoye gold mine in Kazakhstan and Grail, its Australian coal infrastructure, with the latter two assets attracting as much as $3bn, according to some market estimates.

“Infrastructure is in good demand and we should get a good price but we are not getting the levels that we expect for our copper assets,” he said.

But Glasenberg said his team could be more selective over asset sales in the future. “We haven’t sold any assets in a depressed market,” he said.

“We have sold ags [agribusiness] in a good market and gold streams at a strong gold price. We haven’t sold any copper assets in the currently depressed market which is why the Lomas sale hasn’t taken place,” he said. “Vas [Vasilkovskoye] Gold we will look at and Grail is nothing to do with a commodity price.”

Another possible asset disposal, the Cobar copper mine in Australia, would not be considered “… unless we get a reasonable number. We have been selective,” he said.

Commenting on prospects for the remainder of the year, Kalmin said the group was targeting EBITDA of about $10.5bn. “We should see positive earnings and cash flow trajectory,” he said.

Glencore expected to generate between $1.2bn and $1.5bn in free cash flow in the second half of the year having generated $1.2bn in the first half.

Cash from asset disposals would be “the story for the second half” whilst Glencore has a higher interest bill in the first half of its financial year as it pays the majority of its coupons on bonds in that period, said Kalmin.

Having reined-in the balance sheet, Kalmin said Glencore was hopeful of getting back to a BBB credit rating. “Hopefully we have made it easy for others to determine how quickly we can return [to that rating],” he said.

Investec Securities described Glencore’s numbers as “a reasonable result”, but added that some of the market will have expected a better performance based on consensus figures. Goldman Sachs said the figures were “in line”.