EDITOR: | October 2nd, 2015 | 11 Comments

Is there Life After Glencore?

| October 02, 2015 | 11 Comments
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lifering“Everyone loves a winner”… or is it that “Everyone loves an underdog”. Ivan Glasenberg has managed to be unloved either as a winner or as a loser. Frankly, the long-time chief of Glencore has won no friends over the years. Straddling two industries, commodities and mining where big egos are a common denominator, Glasenberg has managed to rub almost everyone up the wrong way. Now with his unsinkable Glencore having ploughed into an iceberg of its own devising, the question is “would you throw this man a life ring if he was drowning?”.

It sounds rather harsh but the takeover of Xstrata was the last straw. Previously he had been just a hard-nosed trader out to get the best deal and build his company into the undisputable 800-lb gorilla in the space. His symbiotic relationship with Xstrata has been somewhat arm’s length so the marketplace had cognitive dissonance in that it “liked” Xstrata while it feared and respected Glencore. Putting the two together in a most unhappy merger made the corporate suite of Xstrata resemble the aftermath of the Shower Scene from Pyscho. Veteran managers, known and famed across the mining industry, were bundled out the door with unseemly haste.

Then the started rattling its cage about going after Rio Tinto as if such a merger was its birthright. Fortunately higher powers stomped on that deal. If the RTZ takeover had occurred, with the massive amount of debt that would have been needed to consummate it, then the bankruptcy of Glencore would already have happened. It was a very dumb deal in an industry in which there is much competition for that title. Beyond financial fecklessness, everybody in the industry knew that such a deal would also have involved massive bloodletting. The whole industry dodged a bullet there.

Then there was the sad but almost unnoticed case of Donner Metals, the junior partner to Xstrata in the Bracemac McLeod Zinc mine. Donner was treated by Glencore like a horde of Cossacks would treat a blushing virgin. The downfall of Glencore may be little consolation for shareholders there but they are certainly entitled to a liberal dose of Schadenfreude.

Fins in the Water

With Glencore being daily battered by the rough waves of global financial markets its market share in many metals is up for grabs. Certainly it has contracts with many miners that require them to keep selling to it, but there is also the discretionary business that is done by many miners, the type of business that gave the trader its 68% share in the global zinc market for instance. After the bad experience of REFCO and father back Metallgesellschaft, one can bet that miners that are not tied down by contracts to sell specified amounts will already be ringing the phones off the hook at the other traders looking for bids so they can diversify (let’s face it – lower) their exposure to Glencore.

Lead & Zinc traders, for instance, at Trafigura and Traxys must have had a bumper week. They would be the most obvious winners from a Glencore stumble. Noble and Wogen would benefit in other metals and then there is the massive Vitol, which jungle drums tell us has long harboured ambitions to  match its heft in oil & gas with similar weightiness in metals trading. It should not be forgotten that Glencore itself was the Phoenix that arose from the ashes of the Marc Rich empire. As we have noted before the principal assets of trading houses pick themselves up at 5pm every afternoon and head out of the building. If they did not come back one day (due to the firm hitting the rocks) and instead set up operations across the road they would not have all their former business to play with, but certainly they would have a lot of it. What’s more they would have whatever proceeds they had cashed out at the IPO, and in the after-market as seed capital for Son of Glencore. This means that the demise of Glencore, or any other trader for that matter, would make only limited rippling of the metals markets and mining sphere millponds.

There are enough other traders out there for the business of the stricken giant to be divided up and redirected with days let alone weeks.

glencore price_chart

White Knights in Short Supply

If fate does claim Glencore, it will not be end of the world. The Swiss government certainly won’t be stepping in to save it. Tax havens have their advantages up to a point. We cannot see any other potential takers. Traders can be poached easily from a stricken trader and major miners would not want it because the overlap with their existing mines would precipitate hefty bargain basement disposals to satisfy competition authorities meanwhile the trading part of the business would be walking out the door.

Revenge is a Dish Best Eaten Cold

As for the mining assets, Mick Davis must be salivating at the thought. Maybe this outcome was the method in his madness in not splurging the cash pile he has at X2. If he stands a chance at recuperating big chunks of his old empire then funders would probably be lining up to put more cash in his warchest.

The question is whether he would want all of his former vehicle’s assets. At the time of the takeover of Xstrata it was a major producer of coal (and the world’s largest exporter of thermal coal), copper, nickel, primary vanadium and zinc and the world’s largest producer of ferrochrome. It had operations in 19 countries across Africa, Asia, Australasia, Europe, North America and South America. A few assets were sold off (most notably the Las Bambas project in Peru that went to MMG). Frankly if offered the entity we would pass on the coal which is not passing a happy moment and does not have the turnaround prospects of the other metals. As mining assets are a buyer’s market, X2 could afford to play the choosy buyer and pick and choose which of these it can afford with its current (or prospective) warchest.

Quite a number of the assets are worth substantially less now that prices have declined from the levels they were when Glencore grabbed Xstrata and beyond that several of the prime Zinc assets are reaching the end of their mine-lives. There is scope to push a hard bargain as it is far from being a seller’s market at the moment. Competing offers would be few and far between.

Conclusion

What goes around comes around. In many ways, pure trading houses are a will-of-the-wisp with little in the way of profit generating assets. Some have backfilled with upstream assets (i.e. mines) in recent years but done so at the cost of enormous debt burdens which are now mismatched with the beaten down value of mineral properties. The trading business is largely goodwill so the creditors are looking at a whole lot of nothing as security for their loans. Some have said that the demise of Glencore is “bad news” for miners but we are not sure that that is true.  Its bad news for those that extended credit and equity holders of the stock, but that does not necessarily have any overlap with the mining community.

Great names come and great names go. Some generate tears when they depart. Some merely a shrug. Remember Donner Metals…. Karma is a bitch..


Christopher Ecclestone

Editor:

Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>


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Comments

  • alan levy

    … and the mighty Phibro bought Salomon Brothers.

    October 2, 2015 - 11:53 AM

  • Tim Ainsworth

    Lol, masterful language Chris, one senses a certain satisfaction in penning that one.
    Good illustration of the shakeout dawning, do you sense any opportunist action by the Chinese?

    October 2, 2015 - 12:31 PM

  • Christopher Ecclestone

    Yes, Alan.. and Goldman Sachs bought J.Aron.. such transactions would not (in theory) be allowed today because of the principal trading element in some (many?) of these trading houses…Goldman have just been exiting their aluminium warehousing business..

    I would not see an investment bank or commercial bank being a rescuer of Glencore and certainly not one that was luxuriating in the FDIC’s “too big to fail” comfort zone.

    October 2, 2015 - 1:16 PM

  • Christopher Ecclestone

    Tim, I had entertained the idea of a Chinese buyer then discounted it…

    The mountain of debt is way too big… They can wait around instead and pick up the assets at the fire sale… they neither need nor want the trading business..

    October 2, 2015 - 1:21 PM

  • Troy Nazarewicz

    Christopher,
    It is also noteworthy that Glencore is closing mines. For instance, they recently announced the suspension of copper production at Mopani in Zambia and at Katanga Mining in the DRC. Katanga also produces ~3000t of by-product cobalt annually, and the suspension removes this cobalt production from the market at a time that demand for cobalt in rechargeable batteries is growing.

    October 2, 2015 - 3:09 PM

  • Christopher Ecclestone

    Troy makes an interesting point.. This closure happened a few weeks before the final pressure-cooking of Glencore this week. Shows two things I believe: that collaterally benefits can accrue from Glencore shuttering mines to others in the mining community, and that the mine portfolio “ain’t what it used to be” in terms of value for potential acquirers.. this lowers the potential price X2 or others have to pay and undermines the collateral value of those holding Glencore debt..

    October 2, 2015 - 4:00 PM

  • G.Smith

    We have seem this happened before with big giant companies that they believe they are supreme almighty gods , they loose track of reality.
    I agree with you Chris , the Chinese will wait the course of events. What I can’t understand is how big conglomerates like Glenmore could not see what was going to happen with metals prices , China used to buy metals until 2012 like mad them they decreased their buying considerably, up today they have not come back to previous levels. Let’s see what happens

    October 3, 2015 - 4:22 AM

  • Jeff Thompson

    Been some excellent movement on Hecla Mining recently, in part attributable to tracking silver price fluctuations up and down, but more importantly/structurally due to Glencore tapering back their zinc plans, which will help Hecla in the near/medium term.

    October 11, 2015 - 9:26 PM

  • Christopher Ecclestone

    Jeff, absolutely true… strange how what is bad news for Glencore is good news for everyone else…. particularly those in my beloved Zinc space…

    October 12, 2015 - 4:21 AM

  • Karl Scott

    Hi Chris. I must admit I enjoyed reading this article. I’m afraid I was on the sinking ship Donner and it was incredibly sad to watch it go from miner of the year honours to bust in one year. That experience almost kept me out of Trevali as my zinc play and until recently it seemed that they might be headed the same way as Donner. Do you see the Glencore connection as detrimental to Trevali in any way going forward?

    October 12, 2015 - 12:58 PM

  • Christopher Ecclestone

    Hi Karl.. my thoughts go out to you and all Donner shareholders.. I was one of the analysts left holding the bag with a Buy recommendation dating form the “good old days” of the Xstrata relationship.. Maybe someone with some powerful voodoo skills put a hex on Glasenberg!

    Trevali is not the only one.. Largo also has a deal and so do many others. The companies should be coming out and addressing their contingency plans for “life after Glencore”.

    October 12, 2015 - 1:04 PM

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