Interactive Investor

Glencore up 80% after funding revelations

6th October 2015 17:13

Harriet Mann from interactive investor

A week after Investec analysts warned Glencore could collapse under its $30 billion debt mountain, and its shares become worthless, the troubled miner has released a funding factsheet to win over confused investors. And it's had the desired effect. The share price hit a two-week high at 120p late Tuesday, taking gains since recent record lows to 80%.

Non-executive director Bill Macaulay is rubbing his hands. The owner of US private equity firm First Reserve who sits on the Glencore board bought 1.7 million shares at a rockbottom 90.91p last week. In just five days he's made a paper profit of almost half-a-million pounds.

And today's document certainly helped. Most expect the price of copper, iron ore and coal to continue falling, and there's little doubt Glencore's profits will suffer - Goldman Sachs is forecasting pre-tax profit of $1.3 billion in 2014 versus $4.9 billion last year - and the proportion of earnings used to repay debt will be compounded. Glencore's gearing ratio is over 300%, dwarfing Rio Tinto's 18% and BHP Billiton's 25%.

Most of the information in the factsheet had already been released in the group's first half results in August, so shouldn't affect credit agency ratings. Standard & Poor's has a BBB rating on Glencore and Moody's has a Baa2, both with a negative outlook. 

"In the event of a downgrade by Standard & Poor's and/or Moody's from current ratings to the level(s) immediately below, a ratings' grid in the $6.8 billion 5-year revolving credit facility provides for a modest additional margin step-up," the company pointed out.

Thanks to a $2.5 billion equity placing, positive cash flow and the launch of its massive debt reduction plan, Glencore's available liquidity is "materially above" the $10.5 billion it had at the end of June. Management are targeting around $2 billion of asset disposals, so the amount of cash it has easy access to should improve.

Glencore's operations are funded through a mix of both short/medium-term facilities worth almost $20 billion, and long-term debt worth over $31 billion. Separately, Glencore has around $5.4 billion of notes maturing within the next year, taking the total value of its notes to $36.5 billion.

Under its short/medium-term financing, it has $15.25 billion of revolving credit facilities - mostly unused - signed with 60 banks for general working purposes, along with $3.1 billion cash and equivalents. Take away its $1.3 billion of issued US Commercial Paper and this is the group's available liquidity at any given time. Management also have access to $1.2 billion which has been secured against its inventory and receivables, and $3.4 billion of bilateral bank facilities.

Its $1.2 billion of secured funding represents just 2.5% of its debt. As lending money without collateral is high-risk, lenders tend to require a higher rate of return. Only $4.6 billion of its facilities were uncommitted at the end of June. This means Glencore has had to meet specific requirements to receive the funding. And in case Glencore is not able to act on a recorded liability, it has $17.9 billion of letter of credit commitments, reflected within the $28.1 billion of recorded accounts payables.

Taking a look at its readily marketable stock, total inventories were worth $23.6 billion at the end of June, of which $17.7 billion is attributable to marketing. This inventory can easily and quickly be turned into cash, it says.

As is common with businesses operating in physical commodities, Glencore manages its exposure through derivative contracts - futures and options - which are continually marked-to-market in Glencore's statements. At 30 June, Glencore had $3.8 billion of financial instrument assets - of which $2.2 billion were commodity derivatives and $1.2 billion were physical commodity forward contracts - and $5.3 billion of contract liabilities.

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.