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Johannesburg - Miner and commodities firm Glencore [JSE:GLN] cut its forecast on Wednesday for earnings from trading, a division meant to help cushion the company against tumbling commodities prices, sending its shares to record lows.
Glencore said tough market conditions, especially for aluminium and nickel, were hurting the business even though it had previously said the trading division would meet earnings targets whatever happened to commodity prices.
Announcing a 29% slump in first-half earnings on Wednesday, Glencore said it expected trading, or what the company calls its marketing division, to post full-year earnings before interest and tax of $2.5bn to $2.6bn.
Glencore Chief Executive Ivan Glasenberg had previously said he expected the trading division to generate $2.7bn to $3.7bn in full-year earnings before interest and tax "no matter what commodity prices are doing".
READ: Glencore CEO: No one can read China right now
"Things change over the year. We now ... have got a good idea how the marketing business is looking. We have always shown you can't be precise," Glasenberg said in a conference call.
Glencore, whose stock is down nearly 46% this year, is the worst-performing stock in the FTSE 100, followed by fellow miners Anglo American, down 40%, and Antofagasta, down 26%. Rio Tinto is down nearly 22%.
Glencore's shares slumped more than 9% to a record low of 159.5 pence on Wednesday and were down 8.2% at 14:10 GMT.
"Glencore's high exposure to copper, whose prices are at their lowest since 2009, is a weakness. Also, the lower projected earnings of the company's trading arm, which is supposed to help the firm buck the commodities cycle, highlight the limits of its business model in this low-price environment," said Sebastien Marlier, commodities analyst at the Economist Intelligence Unit.
Betting on a rebound in Glencore's share price, US investment fund Harris Associates has raised its stake in the company to 4.5%, according to media reports.
Glencore and Harris declined to comment. The fund calls itself a "value investor" looking for firms whose shares have scope to rise.
Glencore also said it would cut capital spending again next year to $5bn from a previous forecast of $6.6bn. It trimmed capital spending plans for 2015 last week to $6bn from a $6.5bn to $6.8bn range announced in February.
"It's hard to predict what China is doing, as an industry we should not be increasing production in anticipation of China demand," Glasenberg told Reuters.
"We will pull back our own production if necessary. Keep it in the ground; you can dig it out anytime."
Copper worries
Analysts had expected deeper cost cuts by Glencore to ease the strain on its debt levels and protect its credit rating.
Glencore said its net debt fell by about $1bn to $29.6bn in the first half and aims to reduce this further to $27bn by the end of 2016.
"In light of the weaker than expected results and current operating environment, rating agencies may begin to question their current stable outlooks on their respective BBB/Baa2 ratings of Glencore," said Rick Mattila, a credit analyst at MUFG.
"That said, the group's solid liquidity position and lower capex plans for 2016, along with the potential for working capital reductions, may continue to give the agencies confidence even in the current circumstances."
Formerly just a commodities trader, Glencore merged with mining company Xstrata in 2013. The marketing business was seen as a plus in diversifying earnings of the combined company as its success was not so closely tied to commodity prices.
Glencore said first-half adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell 29% to $4.6bn, while earnings from its marketing division fell 27% to $1.2bn.
Chief Financial Officer Steve Kalmin said the company's cash flow was "comfortable" to service its debt, return cash to shareholders and support growth in copper and zinc production, where it was pursuing new opportunities.
The price of copper, Glencore's largest earner, is at six-year lows weighed down by a slowdown in China, one of the world's biggest consumers of metals and other raw materials.
Rivals have also reined in spending and cut costs.
Rio this month said it planned $1bn in cost cuts this year and Anglo American is to cut thousands of jobs in the next few years and may sell assets.
