[miningmx.com] — GLENCORE’s somewhat stilted opening this week in London did carry an air of inevitability, following the hype which the advent of its IPO generated. Shares in Glencore are trading at 522 pence at the time of writing compared to the 530p at which they were priced. This underwhelming nature of Glencore’s first few days as a public company raised some – probably incorrect – questions on whether the Swiss firm got its market timing wrong.
It’s worth noting that Glencore is not terribly liquid. Excluding the cornerstone investors, who account for 5.3% of the mere 16.9% in the free float (the rest comprises company executives), there’s barely 10% of the share that investors can trade. Is, then, Glencore a true bellweather of the commodity market? Probably not, says Henk Groenewald, an analyst with Coronation Asset Managers: “The share is not purely exposed to commodity prices. Mining shares (like Xstrata) would be more exposed.’
Add to this the fact that Glencore’s third-party marketing business, which accounts for some $3.1bn of anticipated pre-tax earnings this year – about 30% of total – is geared towards trading off the kind of market volatility we’ve seen this quarter. Ups and downs and ups again are something of an opportunity for a company like Glencore. “The marketing side of Glencore’s business is about volumes and getting a margin,’ says Groenewald.
Piet Viljoen of asset management company RE:CM has been saying lately that commodity prices have been somewhat over-cooked. “I’m not saying there’s a bubble but prices for commodities always return to the marginal cost of production. That fact that iron ore producers have been earning an 80% operating margin is just not sustainable,’ he says.
Certainly, there has been some nervousness in the market. The JSE’s mining index is nearly 8% weaker since mid-April, and there have been corrections elsewhere such as in silver and, to a lesser extent, gold where the withdrawal of George Soros’ funds from paper-backed gold fund SPDR have caused ripples and led to other funds following suit.
Depending on who you speak to, however, the sense among stockbrokers is that the commodity market remains intact, underpinned by the fact that global gross domestic product (GDP) growth will be about 4% this year – the backdrop that economists say is required to keep metal prices ticking over. In addition, the pressure for rate hikes in China is likely to subside as inflation peaks and weak US economic data is not expected to continue.
Much of where we think the commodity cycle is headed is framed by the performance of copper. The cash price of copper has fallen 10% to just about $9,000 per tonne in the last month, but in a resounding show of support for copper, Goldman Sachs said on Thursday the metal will be supported by difficulties producers have in bringing new supply. Not even some retraction in China’s growth can halt copper, it said: “While Chinese growth rates could come off from the historic levels, high single-digit growth from a higher base would still keep global copper supply/demand balance tight.”
“We believe 2011 will be a restocking year for Chinese industry and expect it (copper) to average $11,500/t in 2012,’ said another stockbroker.
GLENCORE/XSTRATA
There’s even a case to be made that Glencore is doing very well indeed. Shareholders sold shares at listing but Glencore management didn’t. Perhaps they know Glencore is, in fact, very well priced by dint of the marketing fever its proposed IPO generated, and that its relatively low free float does a very good job of creating demand over supply for the stock. The end game of this, quite apart from the enrichment of key individuals, is to create more expensive paper in an already expensive market.
Listing enables Glencore to consider bids for entities like Xstrata, although a report by Timothy Huff of RBC Capital Markets recently suggests one shouldn’t hold one’s breath for the takeover/merger, notwithstanding Glencore’s 34% stake in Xstrata and the board representation Glencore has on Xstrata’s board. (Incidentally, Glencore’s Xstrata board representatives are responsible for the Swiss firm’s coal and copper, as well as zinc and lead assets, and which comprise 85% to 90% of Xstrata’s forecast pre-tax earnings.)
Optionality on near-term growth is greater for both companies if they start apart, says Huff. Xstrata has unfinished business with Lonmin, for instance, the platinum company in which Xstrata has a 25% stake. UK stockbroker Evolution was quoted earlier this week as having said Lonmin’s shares were trading 55% below the £33/share level Xstrata was prepared for when it first mounted its takeover of Lonmin in 2008.
For Glencore, it is expected to buy another 42.3% of the shares in Kazzinc to lift its stake to 93% and then it may split and separately list the VasGold assets into Altyntau, possibly in 2012.
A combination of Glencore and Xstrata would also compress the combined unit’s multiple and put other asset deals out of reach. Also, it wouldn’t make sense for Glencore to burn all its cash so early into its listing from a credit perspective, says RBC Capital Markets.
