Avoiding the dreaded selling at the bottom

The sale by Glencore of its GRail coal haulage facilities in Australia for some $870m sees the Swiss-headquartered group lower its net debt by $5.4bn through asset sales alone in just over a year, some $400m in excess of its target. 

This is a quite breathtaking response to the crisis of last year in which shares in Glencore on one occasion fell 16% in a day amid concerns among its key shareholders that its net debt target of $27bn by the end of 2016 was insufficient. 

The company raised $2.5bn through an equity issue and immediately cut the dividend. It then set down asset sales, adjusting its net debt target to the “low 20s”, meaning $21bn to $23bn. It is now likely to do much better than that.

There’s still the possibility Glencore could sell its Lomas Bayas copper mine in Chile as well as the Vasilkovskoye gold mine in Kazakhstan, which could see the net debt figure reduced through asset sales by another $1bn. 

What’s most impressive about Glencore’s response, however, is that it hasn’t sold any of its prize mines; not even close. This has much to do with the “breadth” of the company, which makes it like no other large, diversified mining group listed on the JSE. 

“The deal... reminds investors of the breadth of Glencore’s infrastructure assets,” said Paul Gait, an analyst for Bernstein in London. “These assets tend to be under the radar given that they do not increase revenue but rather lower costs,” he said. “As such, we believe that the market often underestimates the variety of Glencore’s portfolio, and hence the company’s ability to raise cash.”

GRail is non-core to Glencore, and non-mining. “This is not another asset disposal at the bottom of the cycle,” said Gait. Glencore has also locked in its haulage requirements with the buyer for a 20-year period.

Selling assets at “the bottom of the cycle” is exactly the fear South Africa’s Public Investment Corporation (PIC) has regarding Glencore rival Anglo American’s own debt restructuring plans. The firm, which is listed in London and Johannesburg, has earmarked the sale of its bulk mining assets, mainly coal and iron ore, so that it can focus on an unusual mix of platinum, diamonds and copper.

But Anglo’s divestment programme hasn’t been as quick as that of Glencore or of BHP Billiton and Rio Tinto, and therefore it has yet to complete the programme at a time when the commodity markets are beginning to look up again.

Despite the slower response time, shares in Anglo American have soared in the year to date by some 186% at the time of writing. Why then, the PIC is arguing, should it sell its assets when the market is recovering and Anglo is receiving credit for the restructuring it has been able to complete? 

Mark Cutifani, CEO of Anglo American, previously told finweek that his company wouldn’t sell any assets at less than fair value – a view that Investec Securities described recently as Anglo’s “get-out-of-jail card”. 

“While Anglo American is still pursuing its strategy of creating a ‘streamlined and tighter portfolio’, 2016 is not quite the year of ‘radical change’ that it had envisaged back in December last year,” said Investec in a note to clients. The only significant disposal has been its niobium and phosphates assets. 

“We imagine that Anglo will be eager not to be seen flip-flopping on strategy; [but] unfortunately it has the get-out-of jail card of ‘strict value thresholds’, meaning it can back out of the streamlining process if it simply can’t find buyers at the price it is looking for,” it added.

The group’s recently published third-quarter production results showed an interestingly strong performance from its iron assets.

“Iron ore was the big beat, with the company delivering higher volumes at Sishen [a mine held by Kumba Iron Ore],” said Goldman Sachs. “Also Minas Rio was a surprise on production.”

Might Anglo American avoid the painfully complex and politically contorted process of backing out of its South African iron ore and coal assets in the name of a more benign commodity market?

This article originally appeared in the 3 November edition of finweek. Buy and download the magazine here.