Glencore bounce tested as commodity industry faces crisis
Ken Odeluga September 29, 2015 8:25 PM
<p>Updated 1713 BST Flurry of bullish brokerage notes Credit speculators undaunted Deep bond sell-off Glencore fights back Japanese metals shipper goes bust Glencore still […]</p>
Updated 1713 BST
- Flurry of bullish brokerage notes
- Credit speculators undaunted
- Deep bond sell-off
- Glencore fights back
- Japanese metals shipper goes bust
Glencore still has ‘friends’ in high places.
After a remarkable volley of bullish brokerage comments on Tuesday morning, its shares rocketed to the top of the FTSE 100, with a 10% rise.
It seems the loss of another £2.6bn from the miner’s market capitalisation on Monday galvanised the dwindling minority of Glencore bulls into action.
Their efforts, whilst apparently effective, have of course not saved the group from approaching share-price oblivion.
GLEN stock was down more than 80% at the time of writing, from its May 2011 IPO price of 542.23p.
The shove that pushed it off Monday’s cliff came after a brokerage said its ballooning debt had reached a critical level in view of its weak earnings and the continuing fall of commodities prices.
Glencore, which is now infamous for also being the world’s largest commodities trading company, could end up “solely working to repay debt obligations” if commodity prices don’t recover, according to Investec.
There’s no doubt Glencore is the FTSE 100’s most leveraged base-metals miner.
GLENCORE TOTAL DEBT/EQUITY VS. PEERS
Source: Thomson Reuters Eikon
Please click image to enlarge
On a net basis, Glencore is carrying $29.6bn of debt.
It has said it intends to cut this by about a third in the medium term.
Either way GLEN has some high-profile defenders among global banks and brokerages.
- Citigroup: Even a ‘stress test’ copper price of $4000/t (current price= c. $5642/t) and flat prices for other base metals would not stress GLEN’s balance sheet. Cuts to ‘junk’ by rating agencies are unlikely
- Bernstein: Trading business is currently valued by market at $0. But industrial assets still generate cash margins despite severe commodity price pressure
- UBS: Copper prices levelling off amid improving property sales and electricity grid investment in China. Balance sheet well-structured; $2.5bn in free-cash flow possible at current spot prices. Potential for $2bn-plus from further asset sales over the next 6 months
- Even Investec has noted Glencore’s Monday fall was “was well beyond what we had expected”
‘Credit Event’ scented
The mathematics of the assessments above seem sound, and offered in good faith.
However, it’s also fair to say that ‘faith’ is an operative word under the circumstances.
The confidence expressed by many of the brokers was lacking among investors in other asset classes.
For instance, a short-term Credit Default Swap (a credit derivative) in Glencore, had spreads quoted above medium-and long-term levels, earlier on Tuesday.
This ‘curve inversion’ signalled that the credit market was pricing increased risk of a ‘credit event’ in the near term.
GLENCORE CDS CURVE, TUESDAY VS. LAST WEEK
Please click image to enlarge
Glencore’s underlying bonds were also pressured.
For instance the yield of paper which Glencore must redeem in five years last traded at 75%, having been at ‘par’ (i.e. ‘face value’) last week.
To be fair, and contrary to silly market rumours, Glencore’s existing credit lines— including a $15.25bn syndicated revolving facility that commenced in June—have remained open.
Additionally it has net cash (not including other securities) totalling about $10.5bn.
Even so, there’s no getting away from the global commodities price crisis that is on-going.
From a stock-selection point of view, Glencore’s sell-off is rational, even if the extent of its decline may not be.
Signs of distress
Reasonable or not, jittery investors will continue to flee difficult-to-quantify risks, such as Glencore, the commodities trader and miner.
Especially with less-than-clear visibility on China’s economy and ahead of tightening global credit conditions (see Federal Reserve).
News of ‘distress’ elsewhere in the commodities industry will not help.
It emerged earlier that ‘dry-bulk’ shipping company, Daiichi Chuo Kisen Kaisha, had filed for bankruptcy.
It had suffered four annual losses in a row, weighed by falling demand for iron ore and coal.
Its liabilities were around Y108 billion ($900m) as of end-March.
Its market value was $96m.
Shares of another Asian commodities stalwart, Noble Group were also hit.
They closed 10% lower after falling as much as 15% to levels last seen in the 2008 financial crisis.
The events in Asia now suggest we should add fear of financial contagion to the list of challenges the commodities industry faces.
These worries are likely to help keep sentiment on the sector dark, in the medium term.
That’s why our base case is that GLEN’s bounce will be sold.
“Operationally and financially robust”
On the other hand, it has to be said that the stock’s rebound gathered pace as this article was going online.
That’s after Glencore finally broke its silence with its first statement since Friday.
A spokesman for Glencore said the company was “operationally and financially robust” with “positive cash flow, good liquidity and absolutely no solvency issues.”
He added that the firm has “no debt covenants and continues to retain strong lines of credit and secure access to funding.”
The words helped fuel what was probably a short-covering enhanced rally, even further.
GLEN stock traded 17% higher at the time of writing having slacked off from its 10% morning lead to just 4% higher.
However, in its four-hour chart, prices remained within reach of an important floor for traders—261.8% away (72.29p) from their September peak.
GLENCORE FOUR-HOURLY CHART
Please click to enlarge image
Traders tend to watch any iteration of the 61.8% Fibonacci very closely.
Bearish dealing in Glencore stock that is voluminous enough (i.e. in £millions-plus) to require regulatory disclosure, has risen on aggregate by a percentage point since early August.
The FCA’s latest data showed 3.5% of Glencore’s London shares ‘on loan’ for short-selling purposes,
That compared with just 0.64% of Rio Tinto’s.
For safety, shorters tend to ‘cover’ at certain intervals, as per the one noted above.
However, bears will probably scent ‘blood’ from any sign of renewed weakness in Glencore stock.
At that point the level in question is likely to be turn into a target rather than a limit.
Even if the stock rallies further in the short term, it will face a similar test around resistance- that-was-previously-support at 102.89—another 61.8% interval.
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