“We should see the start of a period of price appreciation for commodities in general.” So said Ivan Glasenberg in August last year, before proceeding to bet Glencore’s balance sheet on that happy outcome. The mining-cum-trading house hiked its interim dividend by 11% and launched a $1bn share buyback.
Any temptation to pay down borrowings, which then stood at $37bn, was resisted. The important thing, declared Glasenberg, was to “leverage tightening commodity fundamentals” – in other words, take full advantage of the good times around the corner.
Such hubristic statements have now met the full force of a Chinese economic slowdown. The price of copper, the biggest contributor to Glencore’s earnings, has fallen by a quarter in the past year.
Glasenberg is the not the first mining titan to look a fool. At times over the past decade, this industry has appeared to be on a mission to demonstrate the wisdom of Yogi Berra – “it’s hard to make predictions, especially about the future,” as the obituaries reminded us last week. But it should not be so difficult, if your boardroom is working properly, to finance a company employing 180,000 people in a prudent manner.
On that score, Glencore’s directors have failed. The source of the company’s woes is simple: borrowings of $30bn at the last count, or $47bn if you exclude inventories, are too high for current conditions. Investors fear the benefits of the belated $2.5bn fund-raising a fortnight ago will be lost in the wash if markets remain depressed for another year or so.
Monday’s astonishing 29% fall in Glencore’s share price to 68.6p was attributed to a single analyst’s calculation that the equity could be worthless at current commodity prices. In reality, Investec was merely repeating what others have been saying: that Glencore is so financially leveraged that judging a fair value for the equity is guesswork. If commodity prices improve, the shares are massively underpriced; if they don’t, Glencore may need a lot more capital.
The company grumbles about the short-selling activities of wicked hedge funds but shouldn’t. Glencore could have stayed out of the line of fire if only it had raised more capital earlier. The moment to act was June, when serious cracks appeared in the Chinese growth story. At that point, Glencore’s shares were 270p. A large rights issue would have been painful, but sometimes you have to pay up to banish doubts about your balance sheet.
The baffling part is Glasenberg has been here before. In 2008, during the last commodities bust, Glencore’s credit default spreads blew out as debt markets lost confidence. Glencore easily survived the scare but Glasenberg nevertheless led the business to the stock market in 2011, seemingly to secure access to permanent capital. But, having gained that security feature, he declined to use it as China slowed, and even had to be cajoled by investors into launching the modest $2.5bn placing.
Was that because Glasenberg wanted to resist any dilution of his own 8% holding, now reduced to less than £1bn in value? Or does he just believe his appetite for debt will be vindicated in the end?
Whatever the explanation, the non-executive directors – led by chairman Tony Hayward and including John Mack, former Morgan Stanley supremo – should be embarrassed by the sight of Glencore’s shares being blown around like those of a bewildered, head-in-the-sand bank, circa 2008. They should be asking themselves some hard questions. Here’s one:
BHP Billiton and Rio Tinto, the two companies with the best mines in the industry, have the most conservative balance sheets. Why does Glencore, with higher-cost mines and a trading division that requires vast supplies of cheap capital, have the most aggressive?
Shell can take cold comfort over Arctic failure
Shell chief executive Ben van Beurden would never admit it, but he may be relieved that the group’s first deep well drilled into the Arctic seabed has found no useful oil.
Now he can abandon the Arctic expedition with the minimum of fuss. There is no need to explain to sceptical shareholders why expensive Arctic exploration had previously survived a cull in the group’s capital expenditure budget. And he doesn’t have to risk more damage to Shell’s environmental reputation.
Shell has spent some $7bn in the Arctic – a fifth of its exploration budget since 2007 – but retreat has seemed the obvious step, whatever the test well produced, since the oil price fell below $100 a barrel a year ago.
Why did it take so long to pull out? At a push, one might say that, having spent such colossal sums, Shell had to find out what lay beneath. Unfortunately, one suspects an equal role was played by old-fashioned corporate pride.
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