Glencore, the global commodities giant, the biggest Australian thermal coal exporter and major base metal miner, is in trouble after its shares were battered to record lows in London overnight.
The company’s shares fell by more than 30% in London to a succession of all time lows. That was after the shares dropped 21% last week, and are now down more than 77% so far this year.
The sell off is being driven by growing concerns among investors about the impact of weak commodity prices on the mining and trading house.
Also helping trigger the sell-off were fresh reports out of China showing industrial profits fell in August at their fastest year-on-year pace for almost four years.
The company owns coal mines in NSW and Queensland and has twice cut production in the past year as thermal coal prices have sunk, followed by coking coal prices.
It also controls the huge Mount Isa mining operation, and the associated McArthur River mine in northwest Queensland which produces, copper, lead, silver and zinc. It also controls a nickel mining operation in Western Australia (The old Anaconda).
Shares in the company fell 30% to a record low of 67p in London overnight after the Investec investment bank warned about the increased risks for Glencore’s earnings outlook. The shares floated at 530p on the London market in 2011. They closed down 29% at 69p, a record low closing price.
GLEN.LSE – Glencore shares slump to record low
Over $US5 billion in value was wiped from the company’s shares at the depth of the fall overnight. The company’s market value has collapsed to around $US18 billion from, $US60 billion four years ago.
In fact unlike its peers, such as BHP and Rio Tinto, Glencore shares have been hit hard by the collapse in commodity prices (especially copper) because of its large debt levels at around $US30 billion.
The fall spread to the broader UK mining sector, which has also felt the pain from an emerging-markets slowdown and a crash in commodities prices. The FTSE 350 mining index hit its lowest level since the depths of the GFC in December, 2008.
Copper, which is one of Glencore’s most heavily mined metals, is trading close to its lowest level since the financial crisis. It fell another 1.5% overnight after losing 4.3% last week.
Coal, oil and base metals have all struck multiyear lows, as economic growth in China, the world’s largest commodity importer, slows, and in turn cutting import volumes of key products, especially copper (which are down in the first eight months of the year from a year ago).
Analysts at Investec warned that if commodity prices stayed at current levels, a much greater percentage of Glencore’s shrinking earnings would be needed to service a debt pile that is now far bigger than the listed value of the company.
That’s despite the company making moves to cut debt by $US10 billion – it has already raised $US2.5 billion in a cash placement and is looking for a minority partner for its agricultural arm.
“Debt is fast becoming the most important consideration for mining company management,” Investec analyst Hunter Hillcoat said in a note. “Highly leveraged companies, such as Glencore . . . [could see] their much diminished earnings absorbed by the obligations to debtholders,” the Financial Times reported.
On Tuesday of last week, Credit Suisse slashed its earnings estimates for the metals and mining sector, as well as it forecasts for China demand and commodity prices.
Glencore shares were further hit last Thursday when Goldman Sachs said the company’s steps to reduce debt and bolster its balance sheet were inadequate. The bank lowered its share-price target on Glencore to 130 pence from 170 pence.
