Interactive Investor

Glencore racing to test new low

11th February 2016 12:09

Lee Wild from interactive investor

Less than three weeks before its full-year results, heavily-indebted miner Glencore has served investors the hors d'oeuvres. Unfortunately, unlike December's hatful of cheerful surprises, there was nothing here for investors to get really excited about, and the 50% gain in the shares price over the past three weeks is unwinding rapidly.

A production update was largely in line with expectations and the miner and metals trader has just agreed another so-called streaming deal - an advance payment for part of future production - in South America.

Copper production fell 3% to 1.5 million tonnes in 2015, as Glencore adjusted to industry oversupply issues. Zinc output rose 4%, although final-quarter production was down 20% on the third quarter. Nickel was down 5% and coal 10%, although oil gushed higher.

"The year on year reduction in output has been well flagged as the company has been adapting to the more challenging environment," explains Investec Securities. "The update makes no mention of progress on other aspects of the debt reduction plan (copper asset sales or the sale of the stake in the Ags business) or trading performance."

But, as promised, another streaming deal has been agreed, this time at the Antapaccay copper mine in Peru. Canada's Franco-Nevada will pay Glencore $500 million (£347 million) upfront this month in return for gold and silver linked to copper produced at Antapaccay. Further payments will be made as metal is delivered.

This forms part of Glencore's debt reduction plan announced in September. And, in December, management said efforts to slash debt had gone better than expected.

They had planned to cut debt by $10.2 billion to the low $20 billions by the end of 2016. But, having achieved or locked in $8.7 billion, it raised the target to $13 billion and said net debt will be as low at $18-$19 billion in a year's time versus a predicted $25 billion previously.

A 40% interest could be worth a rumoured $3-4 billion, and the whole business could be worth as much as $10 billion. If a sale cannot be agreed, Glencore's finance director Steven Kalmin raised the prospect of an IPO.

Glencore's share price surged from 70p last month to a high of 106.6p on Monday, driven most recently by a slump in the dollar as the likelihood of any more US rate rises this year fades quickly. A short squeeze ensued.

However, and despite praising its sensible debt reduction programme, our technical analyst John Burford expressed doubts, just as the shares peaked this week. He wrote: "Upside potential appears limited and I would not be surprised to see new lows below 67p in due course".

Just days later, and Glencore is back at 87p.

A dramatically weaker dollar, or surprise in the 1 March full-year results will be needed to prove John wrong.

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.