By Scott Patterson And Alex MacDonald
Glencore PLC has shed more than 60% of its share price since it
went public in 2011, a plunge that illustrates the toll the
commodities-price rout has had on mining firms and has some
investors questioning the company's strategy.
The Baar, Switzerland-based firm's stock earlier this week
dipped below GBP2 ($3.12) a share for the first time, down from
GBP5.30 when it floated in May 2011. It closed 2% lower at GBP1.99
in London Thursday.
The downward spiral is countering forecasts by Glencore Chief
Executive Ivan Glasenberg. In an interview with The Wall Street
Journal months after the initial public offering, he said
Glencore's share price would "take care of itself as we generate
profits."
Glencore swung to a net profit of $2.31 billion last year from
an impairment-driven net loss of $8.05 billion in 2013, but its
share price has swooned since on expectations that its first-half
earnings are likely to be hit by falling commodity prices,
particularly in copper, coal and nickel. The company is to report
first-half results on Aug. 19.
The stock is down 44% in the past 12 months, compared with
roughly 25% declines by Rio Tinto PLC and BHP Billiton Ltd.--two of
its biggest competitors.
Rio and BHP have suffered from their massive exposure to wilting
iron-ore prices, which recently hit a more-than-10-year low.
Glencore, which doesn't have any iron-ore mining operations, was
thought to benefit from its diverse exposure to commodities such as
copper, coal and zinc, but those commodities have also sunk to
multiyear lows.
Glencore "isn't the company to play in a falling-commodity-price
environment," said Nik Stanojevic, equity analyst at Brewin
Dolphin, a $37 billion U.K. private wealth manager. "Their mining
operations are more [expensive to run] than the lower-cost
producers' [and] they have much higher debt" than competitors such
as Rio and BHP, he said.
Brewin Dolphin, which bought Glencore shares after its 2011 IPO,
has whittled down its shareholding to just 2.1 million shares.
Glencore declined to comment for this article.
Created by Marc Rich--a financier once indicted in the U.S. for
tax evasion and later pardoned by President Bill Clinton--Glencore
has long been one of the world's biggest and most successful
traders of commodities. But Mr. Glasenberg, who pocketed about $10
billion in the IPO, moved the company in a new direction by taking
public an operation that had long shunned the spotlight. In 2012,
he followed up by launching the $29.5 billion megadeal for mining
giant Xstrata, which made Glencore one of the biggest miners in the
world when the acquisition was completed the following year.
The company's secret sauce, Glencore executives said, is its
trading or "marketing" arm, which they said could crank out
earnings no matter which direction the market went, propelling it
ahead of competitors. The market arm helped boost earnings last
year, when slumping oil prices allowed traders to purchase oil on
the cheap and strike sales agreements at higher prices in the
future.
Glencore's poor showing since its IPO highlights how brutal the
collapse in commodity prices has been for mining firms. The
downdraft has only accelerated in the past year. The S&P
Goldman Sachs Commodity Index has dropped about 40% in the past 12
months, compared with a roughly 6% gain by the Dow Jones Industrial
Average.
A range of factors are behind the commodity downturn, but the
economic slowdown in China is by far the biggest. During the
so-called supercycle in commodities over the past decade, when
soaring demand from China drove commodity prices to records, miners
spent billions of dollars, expecting the boom to last many years,
if not forever.
Since 2001, the global mining industry has spent more than $1
trillion on mining projects, according to a July report by Goldman
Sachs Group Inc.
In buying Xstrata, Glencore made one of the biggest bets of
all.
But when the commodity collapse came, projects launched during
the boom started to come on line, pouring new resources into the
market like salt on a wound. Prices tumbled even lower and led to
multiple massive charges, including Glencore's $7.5 billion
write-down, largely for Xstrata. The world's top 40 mining
companies have racked up nearly $190 billion in write-downs since
2008, reaching a peak of $57 billion in 2013, according to
PricewaterhouseCoopers.
Some investors see Glencore's stock woes as a buying
opportunity.
"We're in the eye of the storm in anything to do with
commodities," said Richard Buxton, head of U.K. equities as Old
Mutual Global Investors (UK), which has 26.8 million Glencore
shares, according to FactSet. He said he recently purchased more
Glencore stock. "I think the market is completely in panic mode,"
he said.
Investors will get a fresh look at Glencore's performance in the
coming days. The company will report first-half production results
next Thursday, and first-half earnings on Aug. 19.
"I would like to see a continued approach to improve capital
management, cost reduction and lower capital spending with the aim
of improving cash flow, balance sheet and ultimately returning
capital to shareholders," said Charl Malan, senior metals and
mining analyst and portfolio manager at Van Eck Global, which owns
63.6 million Glencore shares, according to FactSet.
Write to Scott Patterson at scott.patterson@wsj.com and Alex
MacDonald at alex.macdonald@wsj.com
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