Glencore could be worth six times more, claim allies

A day after Glencore suffered a mauling after a broker suggested the shares might be worthless, the bombed-out miner has found an ally in Sanford Bernstein's senior analyst Paul Gait. Even if commodity prices remain depressed forever, Gait still sees 93p per share of value. If, as the broker anticipates, prices of coal, copper, zinc and nickel improve, the shares could be worth a staggering 450p.

In a swipe at industry commentators who have laid into Glencore in recent sessions, Gait writes: "Following on from the revelation that commodity companies are leveraged exposure to the value the underlying commodities, the bears then move to highlight that if commodities are worthless so must be the equities and that the greater the financial gearing the quicker the collapse in value of the equity.

"All of this is, to say the least, less than staggering in its intellectual profundity."

Gait and his team believe it's the spectre of thermal coal which is haunting Glencore right now, but they can't understand why. Oversupply has caused the price of thermal coal to halve since late 2010. It's down over two-thirds from its peak in 2008.

"However, against this we would flag that if there is any commodity that is currently trading at the bottom of the cycle, it is coal," says Bernstein. "For those looking for undervalued mining assets, it is hard to believe that there is a better commodity on offer currently."

What's more, the lack of iron ore in the Glencore portfolio and the full range of base metal exposure - copper, zinc, nickel - "make this the choice of investment for those who want exposure to mining but are worried about iron ore prices".

Investec was clearly worried about Glencore's massive debts - even after share placings and asset sales it's still expected to be at least $20 billion - but Bernstein is less concerned. "Even if we assume that the industrial assets continue to produce spot EBITDA [earnings before interest, taxes, depreciation, and amortisation] margins (at spot commodity prices which are particularly depressed at present, with margins of only c.15%), and no contribution from the marketing business, we still see GBp93 of value. And this assumes that commodity prices never recover from their currently depressed state!"

Citigroup pitches in with its own take on events.

It believes Glencore can sell assets for more than the $2 billion outlined recently. It could even flog the entire agricultural marketing business for an estimated $10.5 billion.

Citi also doubts whether banks will pull the credit lines. There are 60 or so banks in the syndicate and no credit ratings-related triggers. And these banks have been dealing with Glencore for decades and are understood never to have pulled out.

It reckons Glencore shares are worth 170p, but if the share-bashing continues, Citi believes there is another option: "We believe that in the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly, with a potential float of just the industrial business occurring further down the track."

And that's not as whacky as it seems. Sentiment is a powerful force, and Glencore's share price plunge has triggered only limited bargain hunting Tuesday. Truth is, no one is really sure where this is going next, and until there is clear evidence that commodity prices are on the up, or have at least bottomed out, Glencore will continue to attract negative criticism.

Many experts still think the sector is doomed to years of price pressure, with any uptick limited in nature. Slashing costs, and, in Glencore's case, its massive debts, is crucial and the success will have a huge bearing on future valuation. For now, however, and while risks highlighted by Investec remain, Glencore shares remain incredibly risky.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.