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Glencore slashes debt as it positions for M&A in commodities

Aug 10 2017 09:16
Javier Blas, Bloomberg

London - Glencore [JSE:GLN] built a war chest in the first half of the year, continuing to cut debt as the world’s largest commodities trading house prepares to ramp up acquisitions.

While profits improved during the first half, Glencore kept its dividend unchanged at $1bn for the year and used the extra cash to pay down borrowings. Net debt was $13.9bn by June, less than half the level in early 2014.

"Our extensive efforts to re-position our balance sheet and drive further industrial asset portfolio improvements over the last twenty-four months are reflected in our strong first-half financial performance," Glencore CEO Ivan Glasenberg said in a statement on Thursday.

He added that the company’s strong balance sheet provides “headroom for highly selective growth opportunities.”

Glasenberg, 60, said back in February that the "time is right" to reward shareholders after difficult years in 2015 and 2016, when the company suspended dividends and sold shares to raise cash. Analysts have speculated that dividends could increase this year, following higher payouts from other mining companies.

Balance sheet

Yet the pugnacious executive appears to be strengthening Glencore’s balance sheet first, a sign the company is looking at deals, rather than immediately returning more money to shareholders.

The company cut its preferred leverage ratio to 1.07, well below its target of 2, suggesting it has the ability to pursue acquisitions. The leverage ratio reached 3 in 2015 after commodities prices tanked.

Glencore

Glencore has already inked some deals, including last month agreeing to pay $1.1bn plus royalties for a large stake in a Australian coal mine. Earlier this year, its agriculture division approached Bunge to discuss a potential merger.

The commodities giant, alongside mining rivals Rio Tinto, Anglo American [JSE:AGL] and BHP Billiton [JSE:BIL], has emerged from a two-year crisis as metal prices, particularly copper and aluminum, recover sharply.

Earnings results

The Baar, Switzerland-based company announced the debt reduction after reporting profit that largely met expectations. It said adjusted earnings before interest, taxes, depreciation and amortisation rose to $6.74bn, up 68% from $4.02bn a year ago.

The company was able to increase Ebitda and net income despite relatively lackluster production growth, benefiting from rising prices for commodities.

“Glencore has the most attractive commodity mix within our wider coverage," Eugene King, a mining analyst at Goldman Sachs, said ahead of the results.

The company said electric vehicles and batteries will boost demand for metals such as cobalt, of which Glencore is the world’s largest miner.

“The potential large-scale roll out of electric vehicles and energy storage systems looks set to unlock material new sources of demand for enabling underlying commodities, including copper, cobalt, zinc and nickel,” Glasenberg said.

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