Glencore H1 Results: Volatility and Acquisitions to Follow

By James Wellstead – Exclusive to Zinc Investing News

Glencore International Plc (LON:GLEN), the world’s largest commodity producer, whose internationally tradeable zinc accounted for 60 percent of the market in 2010, released its first half results today. The take-away from Glencore’s news was continued market volatility and opportunities for acquisitions. As a result of its optimistic earnings and the current financial concerns, Glencore feels it is poised to take advantage of the “short term volatility caused by renewed bearishness on sovereign debt in developed markets”.

Such optimism comes from adjusted earnings (EBIT – earnings before interest and taxes) for the first half of 2011 increasing by 50 percent to US$3.3 billion for the Swiss-based firm with increases from both industrial and marketing operations, by 54 percent and 45 percent respectively. The company also reported a 56 percent year-on-year increase in operating cash flow, reaching US$2.2 billion, adding to their war chest of an estimated US$10.4 billion. As a result of its stronger than expected financial position, Glencore CEO, Ivan Glasenberg, told reporters at a conference call in London, UK “We are an opportunistic company, we are in a fortunate position in that now we have the robust balance sheet to look at assets more aggressively.”

Acquisitions

With market volatility expected into the near term, Glasenburg said that Glencore is aggressively studying mergers and acquisitions as “companies are a lot cheaper,” and this is “definitely, we believe, a very opportune time.” Action is already occurring as just yesterday Glencore made a move to acquire the remaining 26.56 percent of Australia’s nickel miner Minara Resources (ASX:MRE) for AUS$268 million (US$281 million).

Glencore-watchers have also pointed out that the company used the 2008-09 financial downswing to seize opportunities from undervalued asset classes and slumping valuations and is likely to do it again. Deputy Business Editor of the London’s Sunday Telegraph, James Quinn cited Glencore’s winter 2008-09 investment of $500m into Katanga Mining as a key example of its ability to pounce on what it sees as value acquisitions.

The Minara acquisition was the second of the year, with a US$475 million offer for CTS Mining Group (HKG:0985) stake in its Peruvian Marcona copper property the first, but RBC Capital Markets analyst Miriam Hehir predicts more to follow. Hehir said that “Glencore’s outlook statements are encouraging and the balance sheet position is in line with our expectations.” Rumours of a possible bid for South African coal miner Optimum Coal adds strength Hehir’s sentiments.

Another well known secret is that one of the motives for Glencore’s float on public markets was to access capital in order to make further takeovers, including a possible increase in its 35 percent stake in Xstrata (LON:XTA).

However, Michael Rawlinson of Liberum Capital argues that rather than the continued large-scale acquisitions of companies in the ranks of Xstrata, Glencore will focus on “small, weird stuff” – little-known assets in far-off countries.

Yet, despite the optimism and potential for expansion, some analysts maintain less buoyant projections as commodity prices and the developed economy health continue to falter. Glencore is often described as a kind of a proxy for commodities, but its results were seen as a somewhat of an aberration from the world economy. With a Glencore’s marketing division – trading commodities from zinc to oil to grains – accounting for one third of total earnings, some see continued weak share prices as a sign of troubling times to come.

Stock Movements

Glencore’s stock closed out the day at 402.70 pence Sterling on the London Stock Exchange, up 3.36 percent on yesterday which had been 6.07 percent higher on softer than expected losses from its marketing division. However, the stock remains down 25 percent since coming onto the FTSE three months ago following the company’s US$61 billion initial public offering (IPO), and is still far off of the 530 pence IPO float price.

James Quinn of the Telegraph noted that “although much of Glencore’s success is predicated on its unified model – not only mining the assets, but trading, hedging and transporting them – it would appear that its financial side is can explain some of the share price’s recent decline.” The influence of Glencore’s financial side have been so strong as to lead many analysts and traders to claim that its share price tracks more closely with financial firms than it does with mining firms.

But despite their stock prices remaining low, Glencore’s executives believe the world’s optimistic long-term growth, primarily from China and India’s urbanization and strong growth, “will see us deliver organic industrial volume growth conservatively in excess of 50 percent by 2014…particularly in base metals, coal and oil.” Further, buffeting concerns over a near-term financial disaster, Glasenberg told reporters “unless there is a break-up of the financial [system which we don’t expect]—provided that doesn’t occur, we still see robust demand in the commodity markets” which could potentially have the strength to balance potential short-term financial losses.

Glencore’s Zinc Business

Zinc metal and concentrate business accounted for a 10 percent reduction in earnings from marketing, down from US$2.0 billion to US$1.8 billion. The firm attributed this decline to the “strong performance during H1 2010, a period when physical purchasing and restocking in Asia was particularly strong.” During this period, zinc prices increased by the smallest margin of increase over the year, an 8 percent increase to US$2,323/tonne, while most other commodities traded or mined by Glencore increasing more than 20 percent on the year.

Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.