Should You Buy Into Glencore plc’s Recent Freefall?

When commodities trading and mining firm Glencore (LSE: GLEN) launched its IPO onto the stock market in 2011, it was priced at 523p. The share price now stands at 84p at the time of writing. That is a fall of frightening proportions.

But at some point, surely this company becomes a buy? At some point the share price will bounce, and you have a new money-making opportunity. Is this the case with Glencore?

At first sight this company is appealing

Well, at first sight, it seems so. Check the fundamentals, and everything seems fine. A 2015 P/E ratio of 18.69 is pricey, but not unduly so. And this falls to a P/E ratio of 15.63 in 2016.

But what really stands out is the current forecast of dividend yield (not to be confused with historic data). This is predicted to be a whopping 10.81%, falling to 10.53%. Surely the dividend yield is reason enough to buy into the company?

It looks as if this is a contrarian value play — the type of business that has fallen on hard times but that could recover quickly.

But I’m afraid all is not what it seems. Glencore is definitely not a contrarian buy. And if you are unfortunate enough to be a shareholder in this mining giant, then you should sell your shares as quickly as you possibly can.

But I would steer well clear

Why? Because of one four-letter word: debt. Debt can have a devastating effect on companies, and this is no exception. Do you know what the total market capitalisation of this firm is? It is £13.99 billion.

So it’s still worth a lot of money. But what is Glencore’s debt? £5 billion? £10 billion? It is actually an astonishing £30.9 billion. That is over double the company’s market capitalisation.

So if you are thinking of investing in this business because of its dividend yield, there is no point — I expect the dividend to be cut very soon.

And although the company is still profitable, its profits are falling fast, as commodity prices are tumbling across the board. Over the past five years the iron ore price has fallen more than 3-fold, and there have been similar falls in the price of copper and aluminium. This means that there is not enough cash to pay off its debts, let alone to pay out a dividend.

Glencore is now caught in a vicious cycle, with falling profits leading to a falling share price, leading to even less likelihood of the company’s debts being cleared. This business is basically worthless, and there is every likelihood that the share price could fall to zero. Sell now if you are a shareholder, and, whatever you do, do not buy.

Glencore was the poster child of the past decade’s mining boom. It is now turning into a cautionary tale. By all means enjoy a boom while it lasts, but never, ever, be the last to sell.

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Prabhat Sakya 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.