CLERMONT in Queensland on first production in 2010. Then under the helm of Rio Tinto, Clermont is now operated by Ivan Glasenberg’s Glencore. Photo: Rio Tinto

CLERMONT in Queensland on first production in 2010. Then under the helm of Rio Tinto, Clermont is now operated by Ivan Glasenberg’s Glencore. Photo: Rio Tinto

Debt Market Antics Show Glencore's Superior Game

Issue 81, April 2014

Anglo-Swiss trading giant Glencore, one of the world’s largest commodities trading groups and third largest diversified miner, is increasingly diverging from peers by adroitly playing the debt markets to fund counter-cyclical deals.

Glencore’s net debt has ballooned from $13bn on its listing in 2011 to $36bn as of December, with $17bn of the increase shipped in with its takeover of Xstrata last year. Over the same period Rio Tinto’s has risen from $12bn to $18bn, which it plans to lop to the “mid-teens”, whilst BHP Billiton is contemplating a $20bn demerger in an effort to drive borrowing below $25bn.

Analysts speaking off-the-record say Glencore’s rising debt load reflects massive inventory requirements in its trading division and weak prices in the group’s dominant commodities, copper and coal. But Glencore has also used borrowing to backstop expansionary deals, locking in rates at record lows by issuing long-dated bonds, whilst expanding or buying up assets in South Africa and in thermal coal as the rest of the industry takes flight.

“It’s similar to what Xstrata did in the previous upcycle,” says one analyst at a bank currently advising Glencore. “It’s what Glencore did as a private entity as well.”

Taking a tough line on private, debt funded groups expecting to enter the sector, Glencore’s chief executive Ivan Glasenberg warned last week that it was difficult to square mining’s volatile returns with the fixed cost of debt. “The problem with the commodities space if you have high gearing is that you are not running a Boots pharmaceutical where you have a pretty constant earnings base,” Glasenberg said. “You just don’t know your earnings base.”

Such concerns are largely immaterial to major mining houses, able to tap the debt markets at record lows. Glencore is reported to be in the process of refinancing a $17bn credit line undertaken in June at 50 to 60 basis points above benchmark rates, whilst Rio’s most recent bond offering, maturing in 2016, went off at 1.4 per cent.

In October, Glencore also refinanced 10 and 6-year debt at between 2.1 and 3.7 per cent. “When you’ve got a very low margin trading business,” one Switzerland-based analyst said, “any 10 basis points lower interest cost makes a huge difference to your profit.”

Glencore’s willingness to capitalise on low rates by ratcheting up debt has allowed it to escalate volume whilst picking off cash generative assets, adding tonnage to its trading clout. Besides Xstrata, it also swallowed Rio Tinto’s Clermont mine in central Queensland last year, Australia’s third largest thermal coal mine. 

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“Gearing clearly hasn’t constrained Glencore from deals in the past.”

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