Glencore rallies again as zinc output slashed

Glencore shares topped 129p again Friday after another 7% gain on news it's slashing zinc production and sacking workers at mines in Australia, South America and Kazakhstan. It certainly shows the miner and metals trader is serious about tackling its massive debts, and, despite the huge risks run by Glencore shareholders, there is talk that base metals like zinc, copper and lead have potential for a cyclical rally over the next 3-6 months.

Zinc production will be cut by 500,000 tonnes, equivalent to about one-third of Glencore's annual output. The main reason, it says, is to preserve the value of its reserves in the ground as zinc and lead are fetching far less than before. Fourth-quarter zinc production will drop by 100,000 tonnes.

The firm, which last year dug up 1.4 million tonnes of zinc and had been expected to make $1.2 billion of cash profit from it in 2015, said the Lady Loretta mine in Australia and Iscaycruz in Peru will be suspended and operations at George Fisher and McArthur River in Australia and various mines in Kazakhstan will reduce output.

"This is a major move by the company showing leadership in cutting output to help support commodity prices and is more meaningful to the market than the coal supply cuts it previously made," says Investec Securities. "It is however, a worrying reflection of the state of China - which currently consumes around 42% of the world's zinc."

It seems an age ago that Investec sparked a collapse in Glencore's share price to less than 67p. In fact, it was only last week. Obviously, index funds must keep buying the shares as part of their tracking process, but other investors have also brushed aside the broker's prediction that Glencore shares could be worthless if metal prices did not improve. Bargain hunters have piled in and the shares have pretty much doubled since.

Among them is Glencore director and private equity man Bill Macaulay. Last Thursday, he paid less than 91p for 1.7 million shares at 90.91p. Currently, the American is sitting on a paper profit of 41%, or almost £650,000.

And there may be further justification for getting into Glencore, at least according to UBS analyst Myles Allsop. The broker has slashed estimates for base metal and coal prices in 2015-18, and made small upgrades to iron ore. Earnings estimates for 2016 at Glencore are cut by over 30%, too, and China is a real concern medium-term.

However, most commodities are receiving some support as miners rein in supply, reckons UBS. Zinc, it says, looks "oversold", too, due partly to speculative selling.

"We see potential for a cyclical rally over the next 3-6 months in base metals driven by short covering and improving in demand expectations," writes Allsop. "Glencore offers leverage to a base metal price recovery with some value to be crystallised from divestments over next 6 months." In the aftermath of the Glencore sell-off, UBS repeated 'buy' advice and 240p price target.

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