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Glencore shares jump on debt reduction moves, spending cuts

'Broad spectrum' of players said interested in ag business buy-in

(Dave Bedard photo)

Johannesburg | Reuters –– Glencore has increased its debt reduction target and deepened its capital spending cuts, stepping up its response to lower commodity prices and boosting its battered shares by 12 per cent on Thursday.

The mining and commodities trading firm and owner of Canadian grain handler Viterra said it was targeting net debt of between $18 billion and $19 billion by the end of 2016, against a previous target of $20 billion (all figures US$).

CEO Ivan Glasenberg, a veteran of commodities trading who took the company public only four years ago, had to bow to shareholder pressure in September by agreeing to cut Glencore’s debts and protect its credit rating.

The London-listed company’s net debt peaked at around $30 billion, one of the highest in the industry, and prices for its key products copper and coal have been languishing at multi-year lows.

After been spurred into action less than three months ago, Glasenberg said on Thursday the company had accelerated its debt cutting after commodity prices tumbled further.

Glencore’s debt-reduction plan involves asset sales, reducing capital expenditure, suspending dividend payments and raising $2.5 billion of new equity capital.

The price of copper has since fallen nearly 11 per cent and hit a six-year low of $4,443.50 a tonne on Nov. 23.

Glencore had previously said the plan would allow it to withstand copper prices of $4,000 a tonne. A source close to the company said the revised plan would help Glencore cope with copper at below $4,000 a tonne, even at $3,500 a tonne.

Among the assets on offer, Glencore said Thursday it has a “broad spectrum of interested parties” considering a minority stake in its agriculture business, including private equity firms, pension funds, sovereign wealth funds, financial investors and “industry participants.”

The company also said Thursday it expects to have “indicative bids” for an ag business stake on the table by mid-month and to announce a deal sometime in the first half of 2016.

Miners dig deep

Glencore is not the only such company having to scale back radically after prices tumbled.

Mining rival Anglo American said this week it would sell more assets, suspend dividends until the end of 2016 and whittle its business down to three divisions to cope with severe falls in commodity prices.

Platinum producer Lonmin was also struggling, even after its shareholders approved its deeply discounted $400 million share issue to keep the company running.

Glasenberg said the company had already cut debt by $8.7 billion and was well placed to continue to be cash generative in the current environment, and at even lower commodity prices.

Swiss-based Glencore cut its capital expenditure for 2015 to $5.7 billion from $6 billion. Spending is seen falling to $3.8 billion in 2016 from a previous estimate of $5 billion.

“In the current price environment the company will need to show continual delivery against this plan but this update is better than expected, sufficiently detailed and provides a clear debt reduction pathway and timeline,” Credit Suisse analysts said in a note.

Glencore makes about a quarter of its earnings from commodities trading, which had previously allowed it to withstand a steep fall in oil and metal prices slightly better than pure-play miners.

The trading division will generate adjusted earnings of $2.5 billion in 2015, against previous guidance of $2.5 billion to $2.6 billion.

It set guidance of $2.4 billion to $2.7 billion for the division’s earnings in 2016, reflecting lower working capital and reduced copper, zinc, lead and coal volumes.

Glencore estimated group core earnings or EBITDA of $7.7 billion in 2016 at current prices.

Asset sales

Glencore shares, down 68 per cent this year, were up 12 per cent as of 6 a.m. CT.

Glencore also said it aimed to raise between $3 billion and $4 billion from assets sales, up from $2 billion previously. Along with the sale of a minority stake in the agriculture business, chief finance officer Steven Kalmin said Thursday a potential initial public offering for the business was also an option.

The company was also selling its Lomas Bayas copper operation in Chile and its Cobar copper mine in Australia, with initial bids for the three transactions expected by mid-December and deals seen done in the first half of 2016.

Australian, Asian and South American strategic and financial investors had shown interest in the copper mines, the company said.

Glencore was also looking at other asset disposals and more precious metals “streaming” deals, a type of alternative financing in the mining industry where funds are provided upfront to a miner in exchange for the sale of a fixed amount of future, usually by-product, production at a discounted price.

“There are all sort of bits and pieces that are being looked at within the portfolio, some infrastructure, some ships, some rail carts that are looking to potentially add up,” Kalmin told investors.

Olivia Kumwenda-Mtambo reports for Reuters from Johannesburg. Additional reporting for Reuters by Dmitry Zhdannikov in London. Includes files from Network staff.

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