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.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.