GLNCY Glencore Plc (PK)

By Alex MacDonald 

LONDON-- Glencore PLC shares have recouped the ground they lost in heavy selling earlier this week, vindicating management's efforts to restore confidence in the commodities group's finances amid weak commodities prices.

Shares in the Swiss commodities trader and producer rose more than 8% to an intraday high of 99.17 pence a share for the first time since Monday's 29% share-price rout. Shares have since fallen back a little but are outperforming the broader mining sector and London market.

Glencore's communications offensive involved repeated messages to investors on Tuesday and Wednesday that it faced no risk of insolvency while it pressed ahead with plans to reduce net debt of nearly $30 billion.

One option that has emerged recently is selling a stake in its agricultural business, though that would be painful. The agricultural arm's earnings before interest and taxes last year was $856 million for Glencore, almost a third of its marketing division's profit, according to the company's annual report. Glencore has hired Citigroup Inc. and Credit Suisse Group AG to sell the business, people familiar with the matter said.

"Glencore has taken proactive steps to position our company to withstand current commodity-market conditions," the company said in the statements earlier this week.

The company announce earlier this month it was suspending future dividend payments, issuing equity and selling assets to reduce net debt to around $20 billion by the end of 2016.

Despite an initially favorable reaction from investors to the debt-reduction plan, sentiment turned sour amid continued falls in raw-materials prices to which Glencore is exposed as a major producer of coal and base metals as well as one of the world's biggest commodities traders. More broadly, investors are increasingly worried about the scale of corporate debt world-wide as the outlook for earnings growth darkens.

Concerns centered on Glencore's capacity to safeguard its investment-grade credit rating as commodity prices continue to fall unless it took greater measures to cut debt particularly if commodity prices remained lower for longer amid a gloomy outlook for the economy in China, a major consumer of coal, copper and nickel among other commodities. Macquarie Group mining analyst Alon Olsha said in a note this week that Glencore needs to announce an additional $4 billion in net debt reduction initiatives to safeguard its investment grade credit rating from downgrade given the continued price rout over the past three weeks

Losing investment-grade status would severely constrain Glencore's borrowing and its trading arm would have to curtail its activities significantly.

Glencore's shares are still down around 68% this year, making it the worst performer out of the U.K.'s FTSE 100 index. They are down more than 80% since listing its shares in London in 2011.

The stock-price plunge has highlighted problems investors see in Glencore's business model, which combines a massive trading division that buys and sells commodities with a mining arm that produces those materials. The combination was supposed to make Glencore less susceptible to commodity-price downturns, but the amount of borrowing needed to run a trading house has alarmed investors as the company's earnings and share price have fallen.

Prices for the main commodities that drive Glencore's revenue--copper, coal, zinc and nickel, among others--have all hit multiyear lows in recent months.

On Thursday the company confirmed more job cuts in South Africa amid floundering coal prices, the latest in a rash of mining job losses to hit the country. Glencore spokesman Gugulethu Maqetuka said 378 employees would be affected by the closure of its South Witbank mine, with 138 redistributed at other coal operations and the remaining 240 laid off. About 100 employees are expected to be affected as the company talks with labor unions about closing its Witcons coal-processing plant. Glencore also said it is still considering closing its Eland platinum mine in South Africa due to falling prices, putting more than 900 jobs at risk.

In a sign of confidence about the company's future, a U.K. regulatory filing showed that Glencore Chairman Tony Hayward acquired 100,000 shares in the company for around GBP90,890 (about $137,507) Wednesday.

Meanwhile the cost of insuring $10 million of Glencore's debt against default over a five-year period continued to fall Thursday. It is now down nearly a third to $592,000 annually since Monday when the price ballooned nearly 60% to $876,000, according to Markit data. The latest insurance cost is still very high historically, but shows that investor fears may be starting to ease.

Write to Alex MacDonald at alex.macdonald@wsj.com

Alexandra Wexler contributed to this article.

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(END) Dow Jones Newswires

October 01, 2015 07:18 ET (11:18 GMT)

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