Glencore (LSE: GLEN) was hit harder than many in the mining sector by the slump in metals and minerals prices. It had a business built on very high debt levels — and in the depths of the crisis, there were even some who thought the commodities giant could go under.
But a disposals programme has helped get debt under control, and Thursday’s full-year results for 2016 showed just how well that is going. Net debt is down from $25.9bn to $15.5bn. That’s still a lot of debt, but it’s a 40% fall, and net debt now stands at 1.51 times adjusted EBITDA and is looking manageable.
Chief executive Ivan Glasenberg said: “The plan of action we initiated in September 2015 to sensibly bring down our financial leverage and strengthen our balance sheet is now complete. At the end of 2016, net funding and net debt of $32.6bn and $15.5bn respectively, were around or better than target levels, with debt coverage ratios already comfortably below our recently reduced target levels.“
Debt targets exceeded
I’d personally like to see more debt reduction to help shield the company from any future shocks, but we seem to be at the limit now.
This improving performance has driven a turnaround in the trajectory of Glencore shares. From a 2011 high of around 525p, the price had slumped as low as 70p by late January 2016, but since then we’ve seen the price soar to 334p today – after a 2.4% boost in response to the results. With a reversal that dramatic, if you’d invested some cash at the pivot point you’d have multiplied it more than four-and-a-half fold. But can it go even further?
The recovering prices of metals, minerals and oil have certainly helped. Iron ore, a key commodity for Glencore, turned back upwards in January 2016 (aligned perfectly with Glencore’s share price) with the price of a tonne almost doubling in that time.
Copper remained sluggish for much of 2016 but started its recovery later in the year. And while coal prices remain depressed, oil has climbed from its sub-$30 nadir in January 2016 to more than $56 per barrel today.
Profits rising again
That’s all helped Glencore lift its adjusted EBITDA by 17% to $10.3bn, with net profits (before exceptionals) up 48% to $1.99bn — coming in ahead of analysts’ forecasts. Dividends are back too, with the company planning to pay 7 cents per share in 2017, with 3.5 cents paid in the first half. And there were also hints of a special dividend payment — though I don’t like that idea at all and I think cutting debt further would be a better use of the cash.
My Glasenberg also told us that: “Since our IPO in 2011 and subsequent acquisition and integration of Xstrata, Glencore has never been so well positioned as it is today.” But over such a short period I don’t really see that as anything to get too excited about.
Nevertheless, Glencore could soon be on the acquisition trail again, waiting to see what’s worth snapping up over the next couple of years.
But the key for reaching the 400p price level must lie in further boosts to commodity prices. Most metals are still way below their most recent highs and surely have further to go. And I can see oil gradually creeping up thanks to growing demand and the pegging of supplies.
