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Third-quarter Glencore coal production down on Optimum disposal

3rd November 2016

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – Third-quarter production of diversified major Glencore reflects the various operational suspensions and supply reductions announced and actioned notably in coal, oil, copper and zinc.

The London-, Hong Kong- and Johannesburg-listed mining and marketing company, headed by CEO Ivan Glasenberg, said on Thursday that its coal production of 91.9-million tonnes was 11% down on the third quarter of last year, owing to the divestment of Optimum Coal, scheduled closures of various depleted mines in South Africa and adverse weather conditions in Colombia.

The lower production comes against the background of thermal coal prices having more than doubled this year from below $50/t to more than $100/t currently, driven by government-led supply cuts in China.

Glencore’s third-quarter performance received positive reviews from Credit Suisse and Bernstein mining analysts.

Its own-sourced copper production of 1 061 200 t was 6% down on the third quarter of last year owing to the curtailment of African Copper volumes, partly offset by higher grades and throughput in South America.

Own-sourced zinc production of 789 200 t was 30% down on volume reductions implemented mainly in Australia and Peru.

Own-sourced nickel production was 20% higher at 8 400 t, boosted by last year’s major maintenance at the Sudbury smelter in Canada.

Glencore’s share of oil production was a 25%-lower six-million barrels on the natural depletion of the existing fields. Replacement volumes have yet to be drilled as the resource is being preserved for a stronger oil price environment.

The company gave full-year 2016 marketing earnings before interest and taxes (Ebit) guidance as $2.5-billion to $2.7-billion.

It is guiding a lower full-year coal production guidance of 125-million tonnes, down from the 132-million tonnes in 2015, as well as lower copper at 1 420 000 t, lower zinc at 1 100 000 t and lower oil at 7 400 000 bbl, but it is guiding greater ferrochrome production at 1 550 000 t, more lead at 300 000 t and more nickel at 116 000 t.

Credit Suisse mining analysts described Glencore’s third-quarter production performance as solid, with copper, coal and zinc providing 87% of the company’s industrial earnings before interest, taxes, depreciation and amortisation (Ebitda).

The analysts noted Glencore’s narrowing of the lower end of the marketing Ebit as reflecting improved trading conditions within the coal division.

Credit Suisse sees full-year guidance being achievable in copper, zinc and coal, but with the company needing a fourth-quarter step up to hit the guidance target.

They foresee further re-rating potential against the backdrop of deleveraging and divestment targets having been met through the disposal of GRail in Australia and the cash flow rebound potentially triggering a dividend restart in early 2017.

The more than doubling of thermal coal prices this year from below $50/t to over $100/t was driven by government-led supply cuts in China.

Coal remains a key sensitivity for the group with a $10/t price move impacting Ebitda by more than $1-billion.

Credit Suisse notes that most recent Chinese government policy announcements point to an export equivalent thermal coal price of $75/t free-on-board Newcastle.

Mining analysts at Bernstein see Glencore as starting to reap the benefits of its supply discipline, reflected in the zinc price being up 54% since the start of the year and the company beginning to resume production. 

The prices received from the disposal of noncore assets are also seen as good, backed by a demonstration in the third quarter of core business delivery, prompting Bernstein to reiterate its outperform rating. 

Meanwhile in South Africa, the Public Protector’s report on alleged improper conduct by President Jacob Zuma in his alleged improper relationships with the Gupta family, makes considerable reference to the sale by Glencore of Optimum Coal to the Gupta’s Tegeta coal company.

The report alleges that Tegeta received special favourable treatment from State electricity utility Eskom, which enabled it to gain control of Optimum and suggests that this favourable treatment may have contravened financial and other regulations.

The transaction may become part of a judicial commission of enquiry, which the Public Protector’s report recommends.

Edited by Creamer Media Reporter

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