Ivan Glasenberg
Photo by: Duane Daws
JOHANNESBURG (miningweekly.com) – The share price of Glencore soared more than 14% in Johannesburg after the diversified mining and marketing company told investors it would remain comfortably cash positive at materially lower commodity prices, had $14-billion liquidity headroom, beat its capital preservation targets and was experiencing “very good” fourth-quarter sales into China.
In an investor update, the London-, Hong Kong- and Johannesburg-listed company reported that it had accelerated debt and capital expenditure (capex) reduction measures in the face of further price weakness since September and had the flexibility to act further if prices continued to fall.
After-tax and after-capex free cash flow of $2.3-billion has been achieved and earnings before interest tax depreciation and amortisation of $7.7-billion are expected in 2016.
“Right now the market looks solid,” Glencore CEO Ivan Glasenberg said during a conference call in which Creamer Media’s Mining Weekly Online took part.
Macquarie Capital’s Alon Olsha commented that Glencore’s update included decisive action aimed at removing cash flow drag from the business, protecting the balance sheet and safeguarding the credit rating.
“We do not believe management have shown all their cards, however, and believe the company enjoys significant flexibility to respond to rapidly evolving market conditions should the need arise,” Olsha added.
UBS mining research analyst Myles Allsop commented that it was “great to get so many numbers”, which included $8.7-billion of debt reduction and capital preservation measures already in the bag.
Deutsche Bank analyst Rob Clifford commented that it was good to “hear a bit of a spring in the step” of the mining company at a time of tough market conditions, and Blackrock investment officer Evy Hambro remarked that “it was cool” that the company was “actually delivering on its plan”.
Glencore’s share price rose 14.65% to R21.14 a share in Johannesburg by mid-afternoon.
Despite significantly lower commodity prices, 2016 marketing earnings before interest and tax of $2.4-billion to 2.7-billion are being guided.
CFO Steve Kalmin commented that foreign exchange support from a stronger US dollar was significant, given that Glencore’s entire industrial asset base was effectively non-US, taking in countries that included South Africa, Australia, Kazakhstan, Canada, Chile, Peru and Colombia.
Exchange rates, which Kalmin commented were “moving all over the place at the moment”, were underpinning the company’s improved mining dollar cost positions in ferrochrome, coal, copper, zinc and nickel, which were poised to continue moving downwards as local currencies weakened against the dollar.
A 10% increase across the board in dollars would reduce the cost base of the company’s overall product basket by $1.2-billion, he added.
The company, which continues to look for additional measures to preserve capital and reduce debt, has so many trading and production levers to pull that the 2016 target of $19-billion to $18-billion might be exceeded.
Glasenberg said in response to analysts that sales of zinc, copper and nickel into China were also poised to be “very good” for 2016.
“Even for this year, we believe the consumption of copper in China will be up four, five per cent and our order book for next year isn’t showing much different,” he said.
Sixty per cent to 70% of the world’s nickel production was cash negative, “and we all know which operations they are. People are bleeding big cash and the operations stay open.
“We don’t understand it. We don’t understand why people don’t react . . . big mining companies are keeping mining operations open, praying for better prices,” Glasenberg said, adding that all Glencore assets were cash-positive but for two – nickel producer Minara in Australia, which could potentially be put on care and maintenance, and alumina producer Sherwin in the US, which was under review.
Decisions would be made on both of them shortly if commodity prices stayed at current levels.
On potential acquisitions, Glasenberg said only smaller assets had come on the market and “there is nothing that juicy yet.”
Glencore has suffered ten fatalities from seven incidents in the year to date compared with 16 fatalities from 15 incidents in 2014.
Eighty-eight per cent of employees, totalling 158 000, have completed the company’s safety awareness programme, which focuses on catastrophic underground hazard management including ground control, fire and tailings dams.
Marketing remains a defensive earnings driver for the company and production cuts have reduced overall supply and cash outlay, with resources preserved for an improved future margin environment.