Investors in mining leviathan Glencore (LSE: GLEN) must be used to the steady stream of poor news surrounding the company — and indeed, the wider mining industry — by now. Thanks to the steady erosion in commodity prices, the Swiss resources play has seen its share price shed two-thirds of its value during the past 12 months. And a 54% fall so far in 2015 makes it the worst FTSE 100 performer.
However, I believe that Glencore still has plenty more ground to surrender, as current prices still fail to reflect the firm’s poorly earnings outlook. The company is expected to record a fourth successive bottom-line dip in 2015, this time to the tune of a hefty 31%. Such a projection leaves the miner dealing on a P/E multiple of 13.6 times, some way above the bargain barometer of 10 times, and a reflection of the revenues woes still ahead.
Dealing with the debt conundrum
Such a re-rating would leave Glencore dealing on a share price of 95.9p per share, representing a massive 29% reduction from current prices. But even this projection could be considered a tad optimistic, given that the City has been steadily taking the hatchet to its earnings forecasts, and further reductions cannot be ruled out.
Shares in Glencore received a massive boon this week, after the firm announced a raft of fresh measures to cut its $30bn debt pile. Through a combination of more asset sales, a fresh equity placing and a suspension of the dividend until mid-2016, Glencore hopes to cut its debt mountain by a third by the end of next year.
But these measures also raise more uncertainty over the direction of the firm, especially after its aggressive approach saw it acquire mega-miner Xstrata in 2013 and launch a vast $1bn share buyback programme just last year. Indeed, Glencore’s decision raises the question of who is now running the show: the ultra-bullish chief executive Ivan Glasenberg, or concerned shareholders requesting a more realistic approach in light of the worrying industry outlook?
But are commodities prices set to sink further?
Any decision to batten down the hatches and conserve cash in the current climate should be welcomed by investors. But such measures are likely to be rendered meaningless if commodity prices continue to worsen, which is a very likely scenario in my opinion.
Bellwether metal copper hit fresh six-year lows of $4,980 per tonne in late August amid renewed concerns that the Chinese dragon has run out of puff. And the likelihood of further turbulent news from Asia is likely to send metal and energy prices sinking again, in my opinion. When you throw rising mining capacity across commodity classes into the bargain, not to mention the prospect of a galloping US dollar, it is hard to see Glencore enjoying the fruits of any recovery in the near future.
