GLNCY Glencore Plc (PK)

By Alex MacDonald 

LONDON-- Glencore PLC shares seesawed in volatile trading Thursday, first gaining the ground they lost in heavy selling earlier this week and then swinging to a loss as investors and analysts continue to digest information the commodities trader and producer has provided in private meetings to allay investor concerns about its finances.

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 then fell into the red, down 2.5% to 89.26 pence while the FTSE 350 mining index was up 0.4%.

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.

In a meeting with Barclays bankers, Glencore's head of corporate finance and head of strategy and communications sought to clarify "many misconceptions and confusion" about the firm's debt burden and trading business. The executives said Glencore is generating enough cash to pay down debt and could quickly release even more cash by cutting back less profitable trading, Barclays analysts said in a note after the meeting.

The executives also said that Glencore's $50 billion in credit lines have no debt covenants or credit rating triggers that would force it to renegotiate with its group of more than 70 banks, Barclays noted.

Furthermore, the perceived risk at its trading arm is also misplaced since all but 3% of its trades are immediately hedged in liquid futures markets involving counter-party transactions, the executives told Barclays. This means the company takes very little price risk although certain types of physical trades (that couldn't be hedged) resulted in $200 million mark to market losses in the first half of the year, the bank noted.

Lastly, the executives highlighted that a credit rating downgrade in the current low interest rate environment would result in minimal costs that wouldn't necessarily affect the company's trading competitiveness. This is because Glencore has a higher credit rating than its peers. Also traders typically pass on higher trading costs to customers, Barclays noted.

"It was an encouraging meeting as we believe it helped to clear up many misconceptions and confusion we believe is currently in the market around commodity trading in general and the associated credit/counterparty risks associated with trading," the Barclays analysts said in their note.

"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 announced last 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 70% 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, two separate U.K. regulatory filings showed Glencore Chairman Tony Hayward purchasing 100,000 shares for about $138,000 and board member John Mack, Morgan Stanley's former CEO, purchasing 550,000 shares for about $673,000 this week.

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 about a quarter at $677,000 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

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(END) Dow Jones Newswires

October 01, 2015 11:51 ET (15:51 GMT)

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