GLNCY Glencore Plc (PK)

   (FROM THE WALL STREET JOURNAL 9/8/15) 
   By Scott Patterson and Alex MacDonald 

LONDON -- Collapsing commodity prices have forced one of the mining world's most aggressive chief executives into retreat, pushing Glencore PLC's Ivan Glasenberg on Monday to scrap the company's dividend, issue more stock and sell assets.

The moves are the most dramatic yet among companies caught in the deepening, fast-ricocheting effects of the world-wide slump in prices for everything from copper to crude oil.

With a massive trading operation built years ago by founder and controversial financier Marc Rich, Glencore was supposed to be less vulnerable to swings in the energy market. Instead, the company has been hit especially hard.

In an interview, Mr. Glasenberg said the moves announced Monday weren't necessary from his point of view but were made to soothe investor fears of a worst-case scenario in which commodity prices keep falling as demand from China slows further.

Investors have fled Glencore this year, driving its share price down nearly 60%. In comparison, rival Rio Tinto PLC has fallen 25%, while BHP Billiton Ltd. is down 12%. After Monday's announcement, Glencore shares closed up about 7% in London Stock Exchange trading.

"If this doesn't do the trick," Mr. Glasenberg said about the moves, "we'd have a very difficult environment in the world."

The slide by commodity prices to lows not seen since the depths of the financial crisis has been a big setback for Mr. Glasenberg, a star in the mining world who just a year ago made headlines by proposing a blockbuster merger with Anglo Australian mining giant Rio Tinto.

Rio rebuffed the deal, but industry watchers long held out expectations that Mr. Glasenberg, a steely-eyed trader, would eventually win the prize. The likelihood has dimmed because of the damaged stock price and debt concerns.

The South Africa native built Glencore from a commodities-trading house into a mining giant. Known as one of the most secretive trading outfits in the world, Glencore went public in 2011, valuing Mr. Glasenberg's stock at more than $9 billion.

In 2012, he launched the $29.5 billion megadeal for mining giant Xstrata, a combination that ended in a power struggle with Xstrata boss Mick Davis, who eventually left the company to launch a private-equity firm.

Along the way, Mr. Glasenberg has landed some big names, such as former BP PLC chief Tony Hayward, now Glencore's chairman, and former Morgan Stanley CEO, John Mack, a Glencore director.

Glencore's rapid ascent dazzled investors, and Mr. Glasenberg was seen by many analysts and rivals as one of the industry's brightest leaders.

Competing chief executives at Anglo American PLC, Rio Tinto and BHP Billiton stepped down after major investments launched by those CEOs were struck with billions in write-downs. Mr. Glasenberg rattled their successors with exhortations to cut back on production of iron ore this year, but big producers largely shrugged off Mr. Glasenberg.

Now, though, Mr. Glasenberg is facing the toughest test of his career.

On Monday, he responded with a series of moves more drastic than those taken by any other resources company, including large oil companies and integrated mining giants, all hammered by the commodity-price downturn.

Iron-ore prices have fallen 21% this year, while copper is down 18%. Brent oil, the international benchmark, is down 17% since the start of 2015.

In response, Exxon Mobil Corp. and Chevron Corp. have cut share buybacks, while Royal Dutch Shell PLC, BP and most of the world's mining giants are slashing spending. U.K. mining company Anglo American said earlier this year it would cut almost a third of its workforce over the next several years to cope.

Glencore executives are scrambling to protect the company's credit rating, a battle that comes down to reducing debt faster than earnings erode.

Just last month, Glencore officials promised to trim debt amid disappointing financial results for the first half of 2015. But executives also forecast an upturn in commodities prices later this year, and said they didn't expect to resort to dividend cuts or issuing new shares, though Glencore said it couldn't rule out such moves.

On Monday, Mr. Glasenberg said big shareholders he met with in recent weeks told him they wanted more to protect Glencore from a worsening slump. Lower commodities prices have battered earnings, making it tougher to hit key targets tracked by analysts, such as debt relative to earnings and cash flow. Credit agencies use those measures to gauge creditworthiness.

The two big ratings firms, Standard & Poor's and Moody's Investors Service, now rank Glencore two notches above non-investment-grade debt. If Glencore falls into "junk" territory, the company's costs of funding its massive trading operation could spiral, exacerbating the earnings squeeze. Some trading counterparties could also get spooked, pulling out of trades altogether.

Last week, S&P cut its outlook on Glencore's debt rating to negative, citing the company's hefty debt and the impact of the commodity-price slump.

After Monday's announcement, Ben Davis, an analyst at Liberum Capital, said Glencore is "going into full battle mode, which the market certainly appreciates." Despite Monday's stock-price rise, Glencore shares are down about 75% from the company's initial public offering.

Glencore said it would issue new equity to raise $2.5 billion and suspend future dividends to save an additional $2.4 billion.

The company promised asset sales of $2 billion and other cuts, including working capital and capital spending, that will add up to $2.5 billion to $3.3 billion.

Those moves are aimed at reducing Glencore's net debt to close to $20 billion by the end of 2016, compared with its previous target of $27 billion.

The debt-related worries are centered on Glencore's trading operation, which had revenue of $35 billion in 2014. Glencore executives have said their trading or "marketing" business, in which traders buy and sell commodities, can rack up profits no matter which direction the market goes.

Glencore's marketing unit has been profitable every year since 1994, when a group of managers, including Mr. Glasenberg, bought the company from Mr. Rich, who later became famous for getting a pardon for a tax-evasion conviction from outgoing President Bill Clinton. Mr. Rich died in 2013.

Earlier this year, Mr. Glasenberg said trading would make between $2.7 billion and $3.7 billion in annual profit "no matter what commodities are doing." Last month, however, Glencore reduced its full-year projection for trading profit to between $2.5 billion and $2.6 billion.

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(END) Dow Jones Newswires

September 07, 2015 20:05 ET (00:05 GMT)

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