Global natural resources group Glencore has a solid outlook for the next few years, because, among others things, of its diversified portfolio and conservative financial policy, as well as likely rising prices for the main metals and coal that it produces. But there are clouds on the horizon in the form of major legal investigations into its activities and transactions being undertaken by authorities in the US, Brazil and India. There is also the risk that trade wars and possible recession could drive commodity prices down. These opinions are found in Fitch Solutions Macro Research’s recently released report ‘Global Company Strategy – Glencore: Challenges Ahead From Weak Copper Prices’. (Fitch Solutions Macro Research should not be confused with Fitch Ratings; the two entities are affiliated but separate.)
“Alongside years of capital discipline aimed at reducing debt, the firm was able to amass a diverse portfolio of copper, zinc, lead, cobalt, nickel and coal mines that will benefit the firm for years to come,” states the report. During the first semester of this year, while Glencore’s copper production declined by 5% and its nickel production fell by 11%, its zinc production rose 8% and its cobalt production jumped 28%. However, in August, the group reported that it was going to put its Mutanda cobalt mine into temporary care and maintenance at the end of this year.
Glencore also had to record impairments in its African copper projects during the 2018 financial year, totalling $1.6-billion. These included a $0.8-billion impairment of the Mopani copper mine, in Zambia, and a $0.6-billion impairment of its Mutanda mine, in the Democratic Republic of Congo (DRC).
“The firm will target metals used in electric vehicle production, including copper, cobalt and nickel, as well as maintaining a strong coal mining portfolio, despite headwinds from environmentally conscious investors.” The group’s coal portfolio could, as more and more countries move towards low-carbon economies, alienate environmentally concerned investors. Already, Glencore has said it will cap its total coal production to about 150-million tons a year. Moreover, resource nationalism and increasing social opposition to mining are potential threats to new projects and could become problems for existing operations.
In addition, since the start of 2018, Glencore has become the target of investigations by agencies in major jurisdictions. They started early last year with the US Department of Justice examining deals done by the group in the DRC, Nigeria and Venezuela.
Last December, the company became entangled in Brazil’s massive ‘Lava Jato’ corruption investigation and is, along with Vitol and Trafigura, being probed for bribing officials at Brazilian oil and gas company Petrobras. This was followed, in March, by Glencore Agriculture’s office in India being raided by officers of the Competition Commission on suspicion of fixing the prices of staple agricultural products in 2015 and 2016. In addition, a Canadian investigation into Glencore subsidiary Katanga Mining led to that company paying a ‘settlement’ of $22-million and seeing its CEO depart in December.