Market News & Analysis

Glencore shares drop by nearly one-third

On Monday (September 28th), shares in trading and mining company Glencore dropped by nearly one-third to an all-time low of 66.67p. The drop in value followed the move by one investment bank to issue a warning on the risks for Glencore's earnings outlook.

Throughout the year, shares in Glencore have dropped more than 77 per cent and it has been the biggest faller on the FTSE 100. Shares are down 88 per cent from its initial public offering price in 2011. Two weeks ago, $2.5 billion (£1.65 billion) in shares were issued. Since then, the value of those shares has dropped 46 per cent.

Analysts have warned that if commodity prices stay at current levels, an even bigger percentage of the company's shrinking earnings would be required to service the company's debt pile, which is already bigger than the company's listed value, reports the Financial Times.

"Debt is fast becoming the most important consideration for mining company management," said analyst Hunter Hillcoat in a note. He believes that highly leveraged companies like Glencore could see their diminished earnings absorbed by obligations to debt holders.

He added that although Glencore has taken "drastic" action recently, if commodity prices remain at current levels, it could result in an almost complete collapse in future earnings.

"In effect, debt becomes 100 per cent of EV [enterprise value] and the company is solely working to repay debt obligations," he explained.

Plans to reduce net debt

Glencore's market capitalisation is now $18 billion – that's down from $60 billion four years ago.

Last month, the firm announced plans to reduce its $30 billion net debt by a third. This included issuing new shares, announcing plans to sell assets and scrapping two dividend payments.

Chief executive Ivan Glassenberg said the move was designed to "bulletproof" the company's balance sheet. However, the company quickly came under additional pressure.

A collapse in commodity prices has hit the company harder than its peers, due to its high levels of debt. Copper, one of the firm's most heavily mined metals is trading close to its lowest level since the financial crisis. In addition, coal, oil and base metals are also at extremely low levels, partly due to a slowing of growth in China, the world's largest commodity importer.

From time to time, GAIN Capital Limited’s (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.