Glencore takes fresh action to slash debt

Trading in Glencore shares was suspended in Hong Kong earlier as the heavily indebted miner put the finishing touches to its latest missive to investors. Turns out it has put another two mines up for sale in an effort to reduce borrowing and guarantee its survival.

There have been "a number of unsolicited expressions of interest" in both its Cobar copper mine in Australia and Lomas Bayas copper mine in Chile from "various potential buyers". A sale process is underway.

"This will allow potential buyers to bid to purchase either one or both of the mines and may or may not result in a sale," says the company. "Glencore will issue an update only in the event a sale is agreed or disclosure is otherwise required."

Cobar is a high-grade underground copper mine, where plant throughput of about 1.1 million tonnes of ore produces about 50,000 tonnes of copper in concentrate per annum. Lomas Bayas is a low-cost, low-grade open pit copper mine produces around 75,000 tonnes of copper cathode each year. Last week, we reported how both Rio Tinto and BHP Billiton were being urged to halve dividend payments and spend the money on cheap assets instead.

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This is all part of Glencore's promise to cut debt by $10.2 billion from around $30 billion. A $2.5 billion share placing is done and dusted already, and last week the firm said it would cut Zinc production by 500,000 tonnes, about one-third of Glencore's annual output.

That news helped propel the zinc price by 9% last week - the biggest increase in nearly four years – and analysts at UBS think zinc could jump from $0.74/lb to $0.95/lb in 2016. Aluminium jumped by 3.5% for its best week since August and an increase of almost 4% in copper prices was its strongest week in a month. Remember, too, that Glencore has already suspended production at its high-cost Katanga and Mopani mines for 18 months.

And in terms of the impact on Glencore profits, it's not that huge. Cash profit will be 3% lower in 2016 as a result, according to JP Morgan. The stemming of forecast cash losses, however, actually improves earnings by 9% and results in a 10% increase in the broker's net present value. It's why the price target rises by 10p to 160p.

"The outcome of targeted disposals is the key near term catalyst, in our view," writes JP Morgan. "Recent transaction comps would imply precious metal streaming deals, plus a 100% sale of its [agriculture] unit, could generate over $10 billion of proceeds."

Myles Allsop at UBS thinks we'll hear more on Glencore's debt reduction plan at its investor day late next month or in December, following third-quarter production data due on 4 November. In the meantime, he expects "a series of streaming transactions shortly" which could raise over $1 billion. Selling a 40% stake in the Agri business could raise $3-$4 billion, or much more for the whole business.

"We expect the share to re-rate over 6-12 months as management delivers on promises to cut net debt and as the copper/zinc prices pick up," writes Allsop. "We base our target [240p] on 0.7x NPV for Industrial and 10x PE for Marketing."

Glencore trades on an enterprise value/cash profits ratio (EV/EBITDA) of 8.1 times, in line with Rio Tinto, BHP Billiton and Anglo American.

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.