22/09/14 – Ivan Glasenberg ponders Glencore’s next move
Ivan Glasenberg, the chief executive of Glencore, demonstrated in a 48-hour period this year why the Switzerland-based group occupies a singular place among the world’s biggest mining companies.
With acquisitions taboo for most large miners after a decade-long spending binge, perhaps only the ebullient trader would have followed a $5.85bn disposal of a Peruvian copper mine with the $1.35bn purchase of Caracal, a west African oil explorer, a day later.
The flurry of activity showed not only that Mr Glasenberg has retained his eye for an opportunity after the $80bn purchase of Xstrata last year, but also that he has a unique mandate to grow via acquisition, at a time when peers such as BHP Billiton are reversing years of dealmaking growth and streamlining their businesses.
“The market believes the Glencore management team are a solid allocator of capital,” says Dominic O’Kane, analyst at JPMorgan.
“What Ivan buys next” has been a favourite mining sector parlour game even before Glencore’s stock market flotation in 2011. Now it is likely to be played with increasing interest. Glencore has digested most of Xstrata as well as Viterra, a Canadian grain trader it bought for C$6.1bn in 2012, and can take advantage of opportunities while rivals stick to a diet of austerity.
Its shares – currency for large acquisitions – have also started to outperform its mining peers, with Glencore benefiting from its diversity of earnings and lack of exposure to iron ore, this year’s worst performing bulk commodity.
A buzzword at Glencore’s Swiss headquarters is “optionality”. Glencore denies any goal to grow in a particular commodity, insisting only that any mine, oilfield or agricultural production can be funnelled into its formidable trading and logistics machine.
Mr Glasenberg also stresses that he will give cash back to shareholders, including himself with an 8 per cent stake, if no high-returning growth options emerge. Glencore has already started to return capital, launching a $1bn buyback last month, while saying it saw plenty of “organic and other growth opportunities to pursue when appropriate”.
“Do I think Xstrata was the end of Ivan’s ambitions?” asks Paul Gait, analyst at Bernstein Research. “Absolutely not”.
Iron ore oversupply
Glencore dismissed concerns about the glut in the market for the commodity, stressing the diversity of its holdings. ‘We are the only company that has the mining and marketing and a vast array of assets . . . grain, oil and mining’, says Ivan Glasenberg
One of the miners most frequently mentioned as a likely Glencore target is Anglo American. The venerable mining house underperformed its rivals during the commodities boom and fended off a previous takeover bid from Xstrata in 2009. Chief executive Mark Cutifani is battling to revive its fortunes.
However, two of Anglo’s largest businesses are diamonds and platinum, neither of which Glencore trades. In fact, Glencore wants to sell a minority stake in platinum producer Lonmin, inherited from Xstrata.
Other Anglo assets such as coal could also cause antitrust issues for Glencore in South Africa. All told perhaps “less than a third” of the business – its iron ore and copper – will interest Glencore, says an adviser.
Some bankers say Glencore can think bigger. Rio Tinto, larger than Glencore by market capitalisation, gains almost all its earnings from iron ore, where its operations are generally seen as the best in the business. In contrast, Glencore trades but does not mine the steelmaking commodity.
The lack of meaningful overlap between the companies would make the creation of a “GlenTinto” a powerful alternative to BHP, which is ending its interest in several commodities by spinning off a portfolio of non-core assets.
I have said we are not looking at doing M&A. Rio is not eyeing anybody – Sam Walsh, Rio Tinto chief executive
“If Glencore went for Rio and pulled it off it would be the diversified mining investment of choice,” says Mr Gait. He adds that such a combination will “marry the world’s most important set of mining assets to the most sophisticated commodities trading business . . . it is hard to imagine that there would not be value that would be unlocked through such a combination”.
Rio Tinto shareholders would gain exposure to stronger commodity growth, he says, while managing the combined entity with the same financial gearing that Glencore has today could free up $49bn of cash from the balance sheet to hand to shareholders.
While the idea of a nil-premium merger with Rio has appeal, nothing is imminent, according to bankers. “To persuade Rio shareholders to do a deal with Glencore is a big ask and is only going to happen if they get the fright of their life and the iron ore market turns into a real nightmare,” says one banker.
Sam Walsh, Rio’s chief executive, says the idea of a deal with Glencore is “really a question for Ivan” not him. “I have said we are not looking at doing M&A. Rio is not eyeing anybody.”
Another potential target is BHP’s so called “spinco”, with aluminium, nickel, silver and coal assets. When the demerger is completed next year – with a market value estimated at between $10bn and $15bn – it may interest Glencore, say analysts.
But Glencore could also look outside the mining industry altogether for its next deal, which is just as likely to be a bolt-on acquisition as a blockbuster takeover. Few analysts think Caracal will be Glencore’s last deal in oil, while Glencore’s agricultural business still has gaps in spite of the Viterra acquisition.
“The type of deals they continue to do will be bolt-on transactions, which tend to be $1bn to $5bn in size,” says JPMorgan’s Mr O’Kane.
People familiar with the company stress that some work remains in integrating Xstrata, while the oil exploration programmes Glencore is running in Chad and Equatorial Guinea will keep its executives busy for some time.
They also say Glencore’s low-cost options to expand mines via so-called “brownfield” expansions alleviate any urgent need for deals: Mr Glasenberg cited opportunities ranging from copper in Congo to thermal coal in Australia alongside interim results in August.
With Glencore insisting that investments in industrial assets deliver a return on equity in excess of 20 per cent, Mr Glasenberg stresses that the group will not grow for the sake of growing. “We’re not going to keep the cash in the company [just] because we want to . . . for mergers or acquisitions or to look for bigger projects,” he said recently.
But as Mr Glasenberg weighs up his options, he at least knows that he has more freedom to act than any of his industry peers. As one banker puts it: “Glencore is the only miner that has not lost the right to grow”.
Glencore plays down impact of iron ore oversupply
Ask Ivan Glasenberg what sets Glencore apart from its peers, and the answer is diversity.
“We have it all,” he declared at the company’s annual meeting in May. “We are the only company that has the mining and marketing and a vast array of assets . . . grain, oil and mining.”
This is in contrast to its larger rivals BHP Billiton, Rio Tinto and Vale, which are all highly exposed to iron ore. Rio, for example, generated about 85 per cent of its profits from the steelmaking commodity last year.
The price of iron ore has slumped 40 per cent in 2014 and recently hit a five-year low of $82 a tonne as a tsunami of seaborne supply has hit the market, overwhelming demand, which comes mainly from China. Prices are expected to remain depressed as further production comes online.
Last week, Goldman Sachs said the iron ore industry’s long period of above-trend profitability was at an end, destroyed by the billions of dollars that large producers have ploughed into new, low-cost capacity.
Glencore’s exposure to iron ore is small and primarily through its trading arm, although it approved a $900m mine project in Mauritania this year, which is expected to produce 7m tonnes a year starting from 2017.
A question for many analysts is whether Glencore looks to take advantage of falling prices to bulk up in iron ore. “It’s surprising how quickly they have got up the learning curve in iron ore,” says one analyst. “They already market 30m tonnes today from basically zero two years ago.”
In terms of logistics, iron ore is not dramatically different to metallurgical coal – a market Glencore has handled for many years.
“It will be interesting over the next couple of months . . . whether they dip their toe into the water. There are some pretty distressed iron ore producers in the market. That might give us a clearer insight into their ambitions,” says Dominic O’Kane, analyst at JPMorgan.
Source – FT.com