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

Continued from Page 1 ➤

Glencore and Japan’s Sumitomo jointly paid $1bn for Rio’s 50.1 per cent share, with half the cost funded by a non-recourse loan secured against the mine itself. The deal gave Glencore full marketing rights and operational control, lifting its thermal coal trading volumes 15 per cent for an upfront capital outlay of $250m, equal to a quarter of the mine’s construction cost.

Its counter-cyclical strategy has inevitably drawn some criticism: analysts at Investec and JP Morgan have both recently downgraded the stock, whilst credit agency Moody’s this week said that Glencore’s use of proceeds from any sale of its Las Bambas copper mine in Peru, agreed to under a pact with China’s Ministry of Commerce, would be a test of Glencore’s “prudence”.

Thumping shareholder payouts would “increase the potential for a downgrade”, Moody’s said. Glencore wants to maintain its triple-B credit rating, analysts say, but sees little value in seeking to improve it.

The group’s expansionism makes the tactics of Rio and BHP, divulging assets at a low in the cycle to pay off debt when it is cheapest, look comparatively tame. “It’s classical cyclical behaviour,” one analyst with a buy rating on Glencore said. “Glencore are taking a counter-cyclical outlook on things.”

Others say Rio and BHP should not be criticised for showing balance sheet caution, even if they are showing it too late and at the wrong point in the cycle. “They’re very conservative operators, but it means they’re paying next to zero on interest costs when the likes of Vale are paying 8 or 9 per cent.”

The dynamic looks set to push more assets onto Glencore’s balance sheet. Glasenberg has said he is considering a bid for BHP’s Nickel West assets in Australia and having undertaken a surprise listing in Johannesburg last year, Glencore may also be a logical buyer for BHP’s South African assets, thought to fall under its demerger plans.

A full tilt at Anglo American, which Xstrata tried to swallow in 2009, is also not out of the question. “If the world is going to go through this wobble,” one senior analyst said, “then Glencore is well positioned to pick up assets. Gearing clearly hasn’t constrained Glencore from deals in the past.” 

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

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