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Glencore management's own cash ploughed into business

11th September 2015

By: Martin Creamer

Creamer Media Editor

  

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Global commodities mining and marketing company Glencore is taking sweeping financial steps to stave off the commodity price downturn, with management putting its money where its mouth is.

In what is not a rights issue but a fully committed equity issuance, Glencore senior management, including CEO Ivan Glasenberg, CFO Steven Kalmin and several board members, have closed more than a fifth of the raising gap from their own back pockets.

While 78% of the proposed $2.5-billion equity issuance will be underwritten by Citi and Morgan Stanley, the remaining 22% of the issuance will be covered by committed Glencore management.

Some of Glencore's most significant shareholders, including Harris Associates, have given their backing to the diversified mining and marketing company's new moves to lessen its debt burden by issuing fresh equity and holding dividends at bay.

The capital raised will be used to reduce debt and increase financial strength, with the upcoming dividend in suspension mode.

Glen has secured a fully committed proposed equity capital raising of up to $2.5-billion alongside additional $10.2-billion capital preservation and debt reduction measures, portfolio optimisation and cost cutting actions to lower net debt to the low $20-billion range by the end of 2016.

Measures worth up to $7.7-billion are to be implemented between now and the end of 2016, including the $1.6-billion saving through the suspension of the 2015 final dividend and another $800-million from the suspension of the 2016 interim dividend.

A further $1.5-billion will arise from cut working capital and $2-billion will be raised from the sale of assets, including a precious metals streaming transaction and the minority participation of third-party strategic investors in certain of Glencore’s agriculture assets.

Some $500-million to $800-million will spurt from a cut in $4-billion worth of long-term loans and advances made by Glencore, and $500-million to $1-billion will be saved from an additional reduction in industrial capital expenditure to the end of 2016.

The company will exert ongoing focus on portfolio optimisation and reduction of operating expenditure.

The operations at Katanga and Mopani will suspend 400 000 t of copper cathode from the market for 18 months while they engage in plant expansions and upgrades (see separate article).

The strident moves highlight the desire of the company to strengthen and protect its balance sheet amid the current market uncertainty, without affecting its core business activities and overall franchise value, and have been designed to accelerate balance sheet deleveraging, maximise future cash flow generation in the current weak commodity price environment and substantially improve financial and credit metrics, in the event of a prolonged weaker pricing environment.

“We remain very positive on the long-term outlook for our business and this is reinforced by senior management’s commitment to take up 22% of the proposed equity issuance,” Glasenberg and Kalmin said in a media release.

The company said that copper and zinc were both supply-challenged and essential ingredients of future global growth.

In seaborne thermal coal, a capital expenditure drought and low prices had helped rebalance the market.

“We’re confident that thermal coal’s position and availability as the lowest-cost fuel source for many large economies will underpin its key role in the global energy mix for many years to come,” Glasenberg said.

The 2015 full-year earnings guidance for marketing earnings before interest and tax was reiterated to be $2.5-billion to $2.6-billion and the company remained confident of its long-term guidance range of $2.7-billion to $3.7-billion.

Investec Securities last week cautioned that if markets carried on falling, Glencore's capital raising could become tricky.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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