Glencore shares stuck well below asset value

Glencore’s end of year report was bereft of major negative surprises, though attempts to ‘hang tough’ on how fast it needs to sell assets to cut debt, tipped its shares into the red.

Updated on 3rd March to correct tangible book value following new information published by Reuters

A touch of defiance

The group’s £8.69bn adjusted EBITDA was a little above forecasts, adjusted EBIT a tad below, at $2.1bn.

The near-infamous trading unit, in the spotlight due to murky visibility and reliance on short-term credit, also got a tick.

‘Marketing’—Glencore’s name for its commodities dealer—booked adjusted EBITDA and EBIT down 11% and 12% to $2.66bn and $2.46bn respectively—within tolerable range of forecasts.

The $4.96bn net loss may have surprised a few optimists, though it was mixed signals on how aggressive the group plans to be on asset sales, aimed at slashing debt, that brought a halt to the stock’s two-day rally.

We noted continuing lack of clarity over Glencore’s headline debt a day ago.

Ag to stay mostly in bag

Glencore said late last year it was targeting net debt—on the basis of its own adjustments—of $18bn, compared with $30bn in June.

On Tuesday, the group said net debt had been reduced to about $26bn.

However investors were taken aback by CEO Ivan Glasenburg’s insistence that the group would not sell “more than 50%” of the agriculture business.

Glencore’s stake in the farming commodities unit—once valued at $10.5bn—had been mooted as a key plank for plans to get out of a hole.

Glencore did announce expanded asset disposals on Tuesday, pledging $4bn-$5bn more in disposals on top of $1.6bn already done.

But $5bn now looks like the maximum possible from disposal of a small ag unit stake.

Glencore’s reduced debt would then in all probability be on target, instead of well ahead of target, as investors had clearly hoped.

Don’t mention RMI

Naturally, in these scenarios we’re not revisiting the issue of ‘Readily Marketable Inventories’.

Even if we take Glencore’s version of net debt—and treat commodity inventory as ‘cash’ and irrelevant for net debt—there’s no escaping from total impairments of $7.1bn in 2015.

Its asset values are sliding.

It will need to ‘pedal faster’ in what’s turning out to be a buyer’s market for distressed commodity assets.

After undoubted progress on production costs, spending and—with provisos—debt, Glencore’s margin for error is falling.

We therefore think it’s too early to get particularly optimistic on Glencore shares.

Take three

We note the price has doubled for a second time from lows hit in the dark days of September.

With a tangible book value per share currently around $2.34 (about 166p), according to data from Thomson Reuters, speculation on a price at least equivalent to the group’s physical worth could well have begun, judging by the recent advance.

Whether such optimism is timely or too early is the next key question.

In turn, the answer will hinge on how much faith is placed in the commodity sector’s recent ‘revival’.

Or rather what may soon pass as one, looking at Reuters’ ‘Core Commodity’ indices, which have crept about 6% higher over the last fortnight.

From a technical perspective, GLEN is making its third attempt to breach proven resistance above 132p and more precisely between 138p and 139p.

DAILY CHART

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To be sure, the price may have bottled the attempt already, which becomes even clearer in the four-hourly interval chart below.

FOUR-HOURLY CHART

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For the bull case, despite tardiness, GLEN’s rise from re-tested lows in January looks to be its most constructive yet, with supports established and proven at several steps along the way.

These consolidations imply support if required in the event of a reversal.

The stock has largely travelled within a clear channel too.

And Fibonacci retracement markers of the drift back to lows between October and January have been respected on the rebound, bolstering support.

I’d still be wary of calling a breach of 139p in the near term, even if current momentum was not waning, though it is.