Glencore’s chief executive, Ivan Glasenberg, executed a humiliating U-turn as shareholders forced the commodities-trading and mining giant to repair its ravaged balance sheet with a $10.2bn (£6.7bn) rescue operation.
The London-listed behemoth, which has been rocked by tumbling commodities prices four years on from the biggest float in the City’s history, suspended its dividend to save $2.4bn.
It is raising $2.5bn with new shares, costing management, including Mr Glasenberg himself, more than $1bn. Another $5bn will be raised through asset sales and deeper cuts to working capital and investment spending.
Glencore said that the debt pile would be reduced to a figure in the “low-$20bn” area by the end of next year, much lower than the previous target of $27bn. That came after a warning from the ratings agency Standard & Poor’s last week that it could cut Glencore’s credit rating if it failed to trim its debt pile.
Mr Glasenberg had previously insisted that the company did not have too much debt. And on a call with analysts yesterday, the South African-born tycoon made no attempt to disguise his reluctance to enact the latest fund-raising.
“We have pitched our balance sheet for Armageddon,” he said: “We still believe what we said at our interim results, $27bn [of debt] – we felt comfortable at that level. However, we’ve taken note of shareholders stress-testing our balance sheet and stress-testing commodity prices… They would like to see our balance sheet in the position where we can stress-test at low commodity prices for a sustained period. Do we ourselves believe commodity prices will be at those indicated levels for a sustained period? No.”
Mr Glasenberg added that “after listening to shareholders, we decided to make our balance sheet bullet-proof”. He said: “It may be too much – time will tell,” and stressed that the firm saw orders to China picking up during the second half of the year.
He also hinted that Glencore could row back on the decision to suspend the dividend if prices recover: “Let’s see where commodity prices end up, but one thing’s for sure: the balance sheet is in a very strong position… If prices are better during the second half than people anticipate and even if it’s at our level that we had anticipated at the mid-year results, then we can decide what we’re doing with the dividend going forward.”
Glencore is also suspending some African copper-production operations at its Katanga mine in the Democratic Republic of Congo and its Mopani mines in Zambia for 18 months, removing 400,000 tons from the market and slashing operating costs as a result.
Glencore’s shares are at a fraction of the 530p float price in 2011 but rose 7 per cent to 131.8p yesterday as investors welcomed the stronger balance sheet.
Analysts at Citi said the fund-raising “significantly improves” Glencore’s balance sheet. But brokers at Investec said: “We question whether the action being taken is sufficient in the current environment.”
Glencore was worth $60bn when it floated in May 2011, making it the biggest initial public offering the City had seen. The market capitalisation of the firm, which merged with the miner Xstrata in 2013, as of yesterday was just $26bn.
The new equity to be raised will be 78 per cent underwritten by Citi and Morgan Stanley and 22 per cent by management, including Mr Glasenberg. Glencore was once dubbed the “millionaire factory” after it made so many of its workers hugely rich upon floating in 2011, but yesterday’s rescue operation will cost management almost $1.1bn in lost dividends and in stumping up for new shares.
Mr Glasenberg, who owns 8.4 per cent of the business, faces a bill for more than $400m, including $210m in his share of the rights issue, as well as another $200m in forgone dividends. His key lieutenants are also taking a huge hit. Daniel Mate and Telis Mistakidis will be $157m and $155m out of pocket respectively. Tor Peterson faces a $137m bill and Alex Beard will lose $120m.
The repair job comes three weeks after the company crashed to a $676m first-half loss, as tumbling oil prices and fears over China’s growth roiled commodities markets. A US activist investor, Harris Associates, has taken a 4.5 per cent stake in Glencore.Reuse content