Is Glencore PLC’s $2.5bn Cash Call Good News For The Mining Sector?

Glencore PLC (LON:GLEN) is more likely than not to bounce back from its current level, but this Fool needs more evidence to buy its stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Glencore (LSE: GLEN) is showing the mining sector how to act at a critical juncture in this business cycle. Yet its restructuring plan, announced today, sends mixed signals to investors. 

Debt Pile 

The miner will issue up to $2.5bn of new equity capital to trim its debt pile. Additionally, it will implement other measures aimed at saving $7.7bn. 

Trading was suspended in Hong Kong, yet the stock surged over 9% in London in early trade. Antofagasta was up 8.5% at 10.00 BST, while virtually all miners were in positive territory on Monday. 

On the face of it, Glencore’s restructuring is good news for the FTSE 100 — up 1% in early trade — as well as the broader mining sector. 

Just how good is it, though? 

Credit Rating Under Pressure 

The stated goal is to reduce net debt to “the low $20s billion by the end of 2016“.

As I argued in my previous coverage on 19 August, the speed at which its net leverage was rising was worrisome, and could have determined a less generous dividend policy. 

I was not prepared to buy its stock back then, but now it could be a very different story. Let’s delve into the details of today’s release before pulling the trigger!

Good News

Some 78% of the proposed equity issuance is underwritten by Citibank and Morgan Stanley, with the reminder being taken up by management — I am happy with that. 

Glencore estimates that about $1.6bn will be saved from the suspension of its 2015 final dividend, which is an obvious target. Some $800m will also be saved from the suspension of the 2016 interim dividend, which also makes sense. 

So, the up-to-$2.5bn cash call and $2.4bn of dividend cuts will amount to about 50% of its cost reduction programme. 

Uncertainty Remains

The miner expects $1.5bn of additional cash flow from further reduction in working capital management (WCM); there is significant risk with this assumption, given that WCM is almost impossible to model in this environment — but that’s only 14% of the total savings that are being targeted. 

However, there’s even higher risk with estimates according to which $2bn will be raised from asset sales (20% of the total savings). In fact, proceeds from divestments should be assumed at zero in this market, in my view.

Furthermore, Glencore said that between $500m and $800m will be generated from a reduction in long-term loans and advances, but it doesn’t state clearly how that is going to happen, aside from a vague statement that refers to “ongoing loan amortisation and various refinancing initiatives“.

Finally, up to $1bn of savings are expected from reduced capex, while additional operating costs savings will be targeted. 

There’s more bad news than good news here, in my view, simply because a high degree of uncertainty is associated to over 40% of its cost reduction programme, which suggests that the rights issue should be $2bn higher under a base-case scenario. So, thanks but no thanks: I am not prepared to join the Glencore family just yet. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »