S&P upgrades Glencore rating despite higher risk African assets

GLENCORE’S credit rating was improved by S&P Global Ratings in an assessment that takes a sanguine view of the political risk currently making headlines at the Swiss group’s Democratic Republic of Congo (DRC) copper and cobalt operations.

Analysts have commented recently that Glencore has tended to under-perform its peers lately partly owing to a legal dispute in the DRC with former partner, Dan Gertler, and changes to the central African country’s Mining Code which ignores a Stabilisation Clause in the superceded Mining Code of 2002 by imposing higher royalties.

“It appears to us that US sanctions on Mr. Gertler, in a twisted way, could open up an opportunity for China to take advantage of the ensuring chaos to get hold of mining rights, and therefore of copper/cobalt assets,” said Exane BNP Paribas in a report.

It added later, however, that uncertainty over whether President Joseph Kabila might alter the DRC’s constitution in order to run for a third term might be a more ‘asymmetric risk’. Investec Securities also commented that “… [T]he fact is that the miners are dealing with a president who is still in power two years beyond the end of his final term.

“With elections due in November, he is probably looking more at political/financial survival than long-term benefits to his country. Alas.” it said.

But S&P said that whilst it acknowledged Glencore had higher country risk exposure than Rio Tinto, which operated in Latin America and Australia, the Swiss group’s balance sheet was robust supported by large, long-life, and low-cost assets”. It raised Glencore’s long-term issuer credit rating to BBB+ from BBB whilst keeping the outlook stable.

“We estimate that copper, one of Glencore’s major commodities, will represent 39% EBITDA in full-year 2018,” said S&P Global Ratings. “We also project that Glencore’s thermal coal segment will contribute meaningfully at current prices in 2018, at 18% of EBITDA compared with 10% in 2016,” it said.

Thermal coal prices are 45% higher year-on-year and at a spot price of $107/t, are 2% higher week-on-week. Thermal coal futures had their best day since November 2016 rising 4% as investors worried about supply amid strong demand, said Goldman Sachs in a report today. S&P added that Glencore had “… resilience to downside scenarios” owing to first quartile cash costs of its coal and copper operations.