Glencore plays waiting game with JSE

[miningmx.com] – GLENCORE’s interim figures, posted on August 20, included an eye-catching $1.7bn return to shareholders which could assist the Swiss-headquartered firm with attracting more followers on the Johannesburg Stock Exchange.

South African shareholders were surprisingly reticent to buy the Glencore stock when the firm listed in November – a turn of events that investor relations officer, Paul Smith, put down to timing.

“It’s [South African share register] has been growing every month, but we got off to a slow start just as the South African economy contracted,’ he said earlier this month in a briefing with journalists.

“There’s been $1.8bn of buying since January in the stock. Indexation gets in at 5%. We have been achieving 20 to 40 basis points a month. The level of engagement has been good, the buy-side understanding has been good,’ he added.

Currently, South African shareholders comprise about 2.1% of total shares in issue. Once the stock is 5% owned by locals, certain institutional investors are obliged to buy the share.

That’s why the interim figures could prove an especially strong showing for Glencore’s Johannesburg (as well as its international) reputation. Net earnings at $2bn were 8% higher year-on-year, but the share buy-back and the increase in the dividend, as well as bond conversion, reveals a company increasingly attuned to investor trends.

Remember before Glencore’s initial public offering in 2012 when the critique of the day was that the firm’s CEO, Ivan Glasenberg, and his colleagues would struggle with the transition to public life and the rigours of public relations?

The “media roadshow’ that Glencore stages is more than BHP Billiton and Anglo American do at the current time. While the Glencore executives play such meetings shrewdly, it still moderates the firm’s famed reputation for secrecy.

As for Glasenberg himself, you wouldn’t characterise him as reticent to glad-hand the media. He’s often blunt, but it can be refreshing: No, the company is not interested in buying into shale gas; Yes, the company will buy anything if there’s value; No, we won’t build and operate a power station…

Analysts were impressed with Glencore’s interim performance.

“The fact that Glencore – with its higher cost, lower quality assets, high exposure to thermal coal, and still highly geared balance sheet – announced a share buyback, and an 11% increase to its dividend is especially impressive when we compare it to BHP,’ said Christopher LaFemina and Seth Rosenfeld, analysts for Jeffries.

In comparison, BHP has a stronger balance sheet, good free cash flow but stepped back from the buyback and just added 4.3% to the full-year dividend, although it is set to offer shareholders shares in the company that will house its demerged assets, announced earlier this month.

The fact of the matter is that Glencore is different in many ways to its peer group in BHP Billiton and Anglo American, largely because of the way management thinks.
“We are shareholders in the company and we take decisions that are in the best interests of the shareholders,’ said Glasenberg.

For instance, the company isn’t interested in greenfields expansion which Glasenberg views as expensive growth. In fact, there will be no growth projects on its balance sheet by the end of its 2015 financial year.

Nor will the company go in for resource replacement.

Traditional mining companies seek to find new ounces or tonnes of resources as existing projects are depleted. Glasenberg views this activity as unnecessary preferring instead to mine out a property rather than constantly having to reinvent it.

Glencore’s marketing activities is another differentiator. The group’s “industrial assets’ – its mines – produced a fairly modest 3% improvement in pretax earnings whilst the marketing division increased adjusted earnings before interest and tax of 27% to $1.5bn. The effect of the marketing division is that Glencore can produce a decent margin even if the market is in the doldrums.

Said Glasenberg: “We are very happy for the company to kick out cash’. Asked why members of the company’s peer group hadn’t done the same – such as BHP Billiton, he replied: “Why our colleagues in the industry are not doing it, I don’t know. Maybe they are concerned. We know what our expansionary capital is, and it comes to an end in 2015. So even if prices weaken, this is a cash generating machine’.

Analysts loved it. In a note titled “Finally some excess cash’, Citi said the buy-back signalled Glencore had confidence in its free cash flow and balance sheet notwithstanding the difficulties of the commodity market.

Said analysts at Morgan Stanley: “Although it is relatively small in the context of the group’s $83bn market capitalisation … it [the share buy-back] underlines the group’s confidence that it can keep improving cash flows in the current, lower commodity price environment’.