Tightening supply should bode well for commodity prices – Glencore
JOHANNESBURG (miningweekly.com) – Diversified mining and marketing company Glencore, now with a significantly reduced debt profile, is producing its key commodities at exceptionally low operational cost, exemplified by the unit cost of the zinc it produced in the six months to June 30 coming in at the negative unit cost figure of -3c/lb.
In addition to its minus-cost zinc achievement, the London-, Hong Kong- and Johannesburg-listed company, headed by CEO Ivan Glasenberg, also reported significant first-half operational unit cost reductions in copper, which was produced at an average unit cost of 97c/lb, nickel at 246c/lb, thermal coal at $37/t and zinc at 15c/lb when gold by-product credits are excluded.
Full-year unit cost estimates have consequently been reduced to reflect these stronger-than-expected cost improvements.
A suite of first-quartile cost producers is providing Glencore with a good margin, even during this period of low commodity prices.
Should the low current prices persist, free cash for the year is poised to hit the $4.5-billion mark on expected 2016 earnings before interest, taxes, depreciation and amortisation (Ebitda) of around $10.5-billion.
Ebitda at that level will enable the company to function at a two-to-one ratio of net debt to Ebitda, instead of a three-to-one ratio.
After raising $3.9-billion from asset disposals in the first half of the year on a targeted $4-billion, it still intends selling its rail infrastructure business in Australia and monetising another gold asset to enable it to attain its net debt target of not more than $17.5-billion.
Glencore announced on Wednesday that midtier Australian gold producer, Evolution Mining, was acquiring a 30% interest in its Ernest Henry copper and gold mine for A$880-million, entitling it to 100% of the mine’s gold output.
The diversification of the marketing division works for the company, with oil up last year but down this year, and metals down last year but strong this year.
The marketing business again proved resilient and, even if commodity prices fall further, the balance sheet has been strengthened to withstand further price falls.
“We're now in a position that no matter what commodity prices do, we’re very resilient,” Glasenberg told a media conference in which Creamer Media’s Mining Weekly Online took part.
In the six months of low commodity prices to June 30, marketing Ebit increased by 14% to $1.2-billion, but half-year Ebitda was 13% down at $4-billion.
The 21% lower funds from operations of $2.8-billion were more than offset by 51%-lower capital expenditure (capex) of $1.6-billion.
On tightening supply of coal and base metals, Glasenberg said in response to Mining Weekly Online that there were no new mines coming on stream in seaborne coal and no big new mines coming on stream in zinc.
At the same time, copper grades were declining in Chile in particular, where output this year is set to be below six-million tonnes.
In coal, the former big exporter, Indonesia, had cut back to 350-million tonnes a year from 420-million tonnes a year previously.
“Besides grades going down in various commodities, there is no new capex or new mines being built. In my time in the industry, I cannot recall a time when I have seen no new mines being built.
“And that’s proven when you look at the capex of all the major companies. Now that we’ve all reported our half-year results, you take Rio, BHP, Anglo, Vale etcetera and you add it all up, and add the capex they’ve all said they’re going to be spending over the next year, and you don’t get to $20-billion. That’s what just one of the bigger mining companies used to spend in one year. Now there's no new capex spend on new mines, so you'll see production going down over time," he said.
Glasenberg also drew attention to the absence of major coal-mine development in South Africa and its potential negative impact on coal exports from this country.
“You don’t see any big new coal mines being built in South Africa and as you well know, demand for coal locally in South Africa is going to pick up with the new Eskom power stations being developed, and I think it will eventually affect South Africa's export of coal,” he said in response to Mining Weekly Online.
On tightening zinc supply, the Glencore CEO said it was not currently meeting demand owing to the cutback on supply and the shutting of mines.
Although the London Metal Exchange zinc inventory had declined by 5%, one would have to wait and see what impact that will have on prices against the background of the copper price remaining relatively low despite the fall in copper inventories.
On the supply/demand outlook for commodities in general, Glasenberg told journalists that from the company’s own experience, demand from China remained strong, and even when prices tanked, overall demand in the past few years had remained strong.
“Demand’s there. The problem is that we supplied too much into the market. The mining industry increased production over the so-called stronger-for-longer period and we oversupplied the market, and that's what had this very negative effect on commodity prices.
“Now supply is getting a little tighter and this should bode well for commodity prices going forward. However, even if the commodity prices go lower, our balance sheet is well set up for any fall in commodity prices. Even at today’s low commodity prices, our margins are still very good.
“So, low commodity prices will hurt our profits, but the balance sheet’s still in very good shape,” Glasenberg added.
By meaningfully cutting its own production in coal, copper and zinc, Glencore – which employs 160 000 people including contractors – has contributed to the restoration of balance in the supply fundamentals for its own core, upstream commodities.
The company's committed available half-year liquidity of $14.9-billion comfortably covers the next three years of bond maturities.
Its divestment strategy remains one of maximising value, exemplified by the sale of the company's Agri stake, which positions the company for the industry’s inevitable consolidation in the years to come.
After a difficult start to 2016, the more constructive tone of markets in recent months has helped to support the pricing of many of Glencore’s key commodities.
While the company is highly cash generative at current spot prices, it remains mindful that underlying markets continue to be volatile, which is why it retains a high degree of proven flexibility in adapting to changing market conditions.
One of the world’s largest global diversified natural resource companies and a major producer and marketer of more than 90 commodities, Glencore’s operations take up 150 mining and metallurgical sites, oil production assets and agricultural facilities and these are supported by a global network of 90-plus offices located in more than 50 countries.
Glencore's customers are industrial consumers, such as those in the automotive, steel, power generation, oil and food processing sectors, and the company also provides financing, logistics and other services to producers and consumers of commodities.
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