GLENCORE has set aside $1.5bn in provisions related to penalties it believes may be imposed by anti-graft authorities which are currently running investigations into the group’s trading activities in South America and Africa.
Commenting in its full year results published today, Glencore said investigations by US, UK and Brazilian authorities ought to be concluded this year. Separate inquiries which are being run by Swiss and Dutch authorities would continue although Glencore did not think it would face additional penalties for the same conduct.
The $1.5bn provision took total impairments for the 12 months ended December 31 to $1.8bn with the balance consisting of a write down of the group’s Koniambo nickel mine in New Caledonia. The impact was to reduce net income to $5bn.
Nonetheless, this was an extremely good year for Glencore with strong performances at the group’s marketing and industrial assets, the latter recording a 118% jump in year-on-year earnings before interest, tax, depreciation and amortisation of $17.1bn.
This allowed Glencore to reduce net debt $9.8bn to $6bn – well below the group’s newly adopted cap of $10bn and paving the way for $4bn in shareholder returns of which $550m was in share buy-backs, equal to $0.04 cents per share in value. The base dividend was therefore $0.26c/share or $3.4bn.
“In spite of the ongoing challenges of Covid-19, 2021 was an extraordinary year for Glencore, reflecting rising demand for our metals and energy products, record adjusted EBITDA and the transition to new leadership,” said Gary Nagle, CEO of Glencore.
Analysts said the shareholder return communicated a strong message about Glencore which, based on the group’s cash flow projections for the current financial year, could be improved further. “Strong cash flow expectations for 2022 leaves more room for the company to engage in capital returns,” said Citi in a note.
Glencore generated equity free cash flow of $13bn last year, described by Glencore CFO Steve Kalmin today as its single most important driver of financial performance. For 2022 Glencore has indicated a free cash flow of $14bn at current spot prices for its products.
Asked to comment on the possibility of increasing the buy-back programme this year, Kalmin said he wouldn’t “chase” the share price were it trading at £9/share (currently at £4.33/share). Normally, the preference was to pay shareholders cash “but we’ll come back to this in August,” said Kalmin.
Glencore overhang
A factor that could influence Glencore’s share price would be resolution on the investigations by the US Department of Justice, the US Commodity Futures Trading Commission, and the UK Serious Fraud Office (SFO). The inquiries – dating back to 2018, and relating to Glencore’s business in Nigeria, the Congo, and Venezuela from 2007 – have constrained Glencore’s rating.
Citi said the provision taken by Glencore “… should help to address the uncertainty on this front and could potentially reduces an overhang from the stock”.
Morgan Stanley said the fact Glencore had taken a position on the possible cost of the investigations would be well received by the market as uncertainty had “… weighed on sentiment since 2018. “We had assumed a $4.5bn negative impact on Glencore’s equity as a result of these investigations,” the bank added.
Commenting on the investigations, Glencore said earlier that whilst it couldn’t forecast with certainty on the cost, extent, timing or terms of the outcomes “… the company presently expects to resolve the US, UK and Brazilian investigations in 2022”. The $1.5bn raised in provisions represented the company’s current “… best estimate of the costs to resolve these investigations,” it added.
“The US resolutions are expected to cover separate investigations into bribery and market manipulation. The resolution of the other investigations into the group is not included within this provision and they remain ongoing,” Glencore said.
By way of a guide, past fines imposed by the SFO have included $650m on Rolls Royce after initially being slapped with an $870m fine.
