Banks' gentle words are at odds with Glencore reality

Outlook

Read some of the big banks’ advice to investors on Glencore and you’d think all was well. “Not a bad set of numbers”, one research note declared. “Year-on-year improvements in cost targets”, said another. “Balance sheet better than expected”, “net debt of $29.5bn a positive”.

But all is far from well at this misshapen beast. These were a “bad set of numbers”. Tinkering with cost targets is not enough for a business whose shares have collapsed 47 per cent this year. The balance sheet – far from deserving “better than expected” praise –remains terrifying: net debt at nearly $30bn is a long way from “positive”.

True, as the City analysts champion, that debt pile has fallen by $1bn and, yes, Glencore has pledged to cut it further in the coming months. But as a proportion of its plunging underlying profits, debt actually increased by 13 per cent over the first half. And that balance sheet stretch comes despite the old one-off trick of lengthening payment terms for suppliers from 46 to 63 days.

Credit rating agencies don’t like this kind of debt. To them, it looks like a big wooden box marked “TNT” with a fizzling cord dangling out of the side.

Ah, the analysts say, but don’t worry. Glencore can cut debt by turning down its trading operations a notch, reducing the cash it needs to buy the shiploads of copper and grain it trades around the world.

But that is to miss the fact that trading makes up more than a quarter of Glencore’s earnings, now that mining is on its knees. In fact, trading is one of the few parts of the business where profits should improve in the second half of the year.

Furthermore, if you believe Ivan Glasenberg’s business model, the trading arm of Glencore – with its high-level contacts among buyers, sellers and governments – is crucial to that fabled Glencore insight into future commodities prices. At least, that’s what he told us at the time of the flotation, shortly before Mick Davis got him to pay a 13 per cent premium for Xstrata, just before prices tanked.

Anyway, with notable exceptions (JPMorgan, take a bow), you won’t hear that from the banks and brokers, despite the collapsing share price.

Could that have anything to do with Mr Glasenberg’s canny move back in 2011 to get 23 of them on the payroll for the Glencore float?