16 11 13 MiningMX – What does Glencore bring to the JSE ?

A year earlier,
Switzerland granted Glasenberg citizenship and a passport that he
pockets along with those to South Africa, Israel and Australia –
national allegiences that are really more commercial footprints.
Glasenberg
is a citizen of a globally traded commodities empire now called
GlencoreXstrata of which he is CEO. Zinc in Kazakhstan to nickel in
Quebec, it’s all part of a game of risk Glasenberg expertly manages.
Once
described as the biggest company you’d never heard of, GlencoreXstrata
is now very public. After nine years spent growing Glencore from its
headquarters in the canton of Züg, Glasenberg listed it in 2012 and a
year later merged it with Xstrata. At $38bn, it was one of the largest
deals of the year.
So it’s not surprising the proposed
secondary listing of GlencoreXstrata on the Johannesburg Stock Exchange,
expected by the fourth quarter according to a company statement on
September 10, has been met with excitement in South Africa – and not
only because it provides the country’s beleaguered mining investors with
a break from the tedium of negative newsflow.
“It does mean a
lot,” says Zeona Jacobs, director for issuer and investor relations at
the JSE. Anglo American generates 5.5% of trade by value on the bourse
so there’s some expectation that GlencoreXstrata, which at a market
capitisation of R667bn is double the size of Anglo American, will have a
significant impact.
“A company of this size and magnitude means a lot in terms of trading. We’re very excited,” says Jacobs.
VARIETY FAIR
So what will investors be getting when GlencoreXstrata takes its place on the JSE? In a word: variety.
“South
African fund managers are relatively limited in what they can buy,”
said Michael Kavanagh, an analyst for Noah Capital. “You normally end up
playing Anglo against BHP Billiton at different times, but
GlencoreXstrata is a completely different animal to either of those
companies,” he said.
It is certainly more diversified. In the
estimation of David Pleming, investment manager at the privately-owned
Tantalum Capital, Glasenberg’s company differs from the other major
mining groups in that it doesn’t have any exposure to iron ore
production, the price of which is forecast to fall.
"The platinum asset is non-core; it doesn’t have a trading abilty so we don’t think we’re giving up a big advantage"
Based
on the first half of the current financial year, 89% of Rio Tinto’s
pre-tax earnings was derived from iron ore; BHP Billiton had 52%
exposure to iron ore, while Anglo American derived 48% of pre-tax
earnings from the steel ingredient.
In contrast,
GlencoreXstrata has smaller exposure to more commodities such as oil
sector, coal (14% of pretax earnings), nickel (3%), and zinc (13%). Its
biggest exposure by commodity is to copper which comprised 30% of pretax
earnings. The crucial difference about GlencoreXstrata, however, is
that it trades all of the above.
Speaking at an investor day
earlier this week, Glasenberg said his company wouldn’t invest in
minerals that it couldn’t push through its infamously aggressive
marketing division, a collection of traders described somewhat
apochryphally one suspects as cut-throat.
They sell minerals,
but they also deal in the agriculture sector trading grain, wheat, soya
as well as cotton. Marketing agricultural products may have provided
only 1% of pretax earnings, but metals and energy trading comprised 38%
of pretax earnings – the single largest contributor.
The
trading division requires a lot of working capital – as marketers will
not hesitate to stockpile minerals at the mine when prices are poor,
hence the often jabbing accusation that GlencoreXstrata ‘controls’ the
markets.
It doesn’t require heaps of capital expenditure to
run a trading business like this which means there’s less capacity for
misuse of capital in long-lead projects for which the world’s mining
industry has been heavily criticised by shareholders lately.
Whereas
mining companies mine, GlencoreXstrata mines in order to market. That’s
why the liquidiation of GlencoreXstrata’s 25% stake in platinum
producer, Lonmin, is just a matter of time.
Said Glasenberg:
“We don’t want to hold an asset where we don’t trade the commodity. We
need to take advantage of our trading base. The platinum asset is
non-core; it doesn’t have a trading abilty so we don’t think we’re
giving up a big advantage. But we won’t rush it [the sale of Lonmin]. We
will review it as time goes on.”
The downside to a business
like GlencoreXstata, however, is that it’s difficult to keep track of
the working capital given the dynamic nature of the business.
For
one UK analyst, who asked not to be named, it means the company’s books
can be opaque. “I’ve spent hours trying to track down $25bn to $30bn of
working capital, which is a fair old number.
“You don’t
always know where the cash is: stockpiled on a mine, with a customer, or
on a boat. And when you’re trying to work out net debt, you have to
deal with the fact that GlencoreXstrata adds back cash from so-called
quickly realisable capital,” he says.
The company has improved
its transparency, but it will always be opaque, both in its trading and
in the way it assesses new avenues for investment. In fact, Glasenberg
openly admits the company to being ‘opportunistic’, taking risks where
others hesitate.
In 2012, Global Witness demanded Glencore
explain “… potentially corrupt deals in the Democratic Republic of
Congo” (DRC). This was a reference to Glencore buying shares in copper
mines owned by Dan Gertler, the Israeli businessman who is alleged to
have bought assets through DRC president Joseph Kabila at enormous
discounts.
Glencore and Gertler have questioned Global
Witnesses claims, and challenged the valuations it placed on the copper
assets reputed to be involved.
CAPTIVE AUDIENCE
Mike
Teke, deputy president of the Chamber of Mines of SA, knows a thing or
two about GlencoreXstrata’s opportunism having had his Optimum Coal
circled and consumed by the Swiss group in 2012 for about R10bn. “They
are very entrepreneurial with good energy. I think listing here is a
stamp of approval for the country,” said Teke.
Nobody believes
GlencoreXstrata’s listing here is just that, however; certainly not
Teke who declined to comment much on the group’s trading style,
restricting his views to having found his experience of Glencore as
‘pleasant’.
In its official comment, GlencoreXstrata said
listing in Johannesburg was motivated by the fact that Africa was an
important and growing market for the group, and South Africa has a
strong institutional base. But As his collection of passports would
indicate, Glasenberg’s interest in Johannesburg is strictly business,
not a homecoming.
“South Africa is a captive market. It offers
South African investors an opportunity to invest capital in a company
that would normally be trapped in the country,” said Marc Elliott, an
analyst for Investec Securities in London.
Roughly a third of
GlencoreXstrata’s 20 assets globally are located in Africa including
dominance in the coal and coal exporting market in South Africa. It is
also the majority shareholder of a joint venture with Merafe Resources.
The
Johannesburg firm’s CEO, Zanele Matlala, comments that GlencoreXstrata
is driven solely by margin. “I don’t think they look at things from a
size point of view,” she says, adding that the merger with Xstrata,
Merafe’s original partner, was unlikely to mean changes despite comments
from Glasenberg earlier this week that the group would continue with “a
comprehensive review of assets”.
“South Africa is a captive
market. It offers South African investors an opportunity to invest
capital in a company that would normally be trapped in the country"
“They like to be in ferrochrome because they can trade it. You really
only get on GlencoreXstrata’s radar if you’re not profitable,” she said.
Profitability,
and more importantly, return on capital employed (ROCE), has not been a
feature of mining companies have brought to investors, even through the
mining boom. It has led to significant liquidations of mining shares by
investors and resulted in the spate of CEO resignations, principally on
the back of having paid for assets that couldn’t provide a real return.
Glasenberg
says GlencoreXstrata is only likely to invest in brownfields projects
where capital required is much lower than building new greenfields
projects.
“Executives have been trying to understand supply
and demand rather than just pushing metals in the market. Shareholders
are also talking,” he said. “I think this is a big new change.”
Glasenberg
said the mining sector had to be ‘vigilant’ about repeating the
excesses of the mining boom, expanding production in an inexorable
pursuit of growth over value. “If we do see commodity prices increasing,
we should not get carried away and over-supply the market,” he said.
“We
are shareholders in Glencore so our capital allocation is very
vigorous. It’s our money like it’s your money,” he added. That’s once
crucial difference in GlencoreXstrata compared to its peer group. Senior
management holds about 25% of GlencoreXstrata shares whereas in BHP
Billiton, Rio Tinto and Freeport, a North American company, senior
management holds on average 0.03% of the stock; 1.02% in the case of
Anglo American.
“There is no bureaucracy, no emphasis on
titles. We own the money,” Glasenberg says. “It must be simple, and it
must be swift,” he says of headquarter decision-making.
Xstrata
was not one of the industry’s most bureaucratic companies. The way its
CEO Davis saw it, Xstrata’s head office was slight with asset control
devolved to the business units, a structure Davis felt made the company
nimble. Glasenberg, however, was still able to strip out up to $2bn in
costs following the ‘merger’ with Xstrata, some four times more than
originally forecast.
“A significant portion of the synergies
are in overhead costs at head and regional offices,” he said. “We are
only just starting to look at the combined mining and metallurgical
operations.”
Of the $2bn in synergy-related savings, the bulk
($1.4bn) would come from direct cost savings while the balance would be
made up from $450m in marketing synergies, as already forecast, and
$175m from financing synergies.
There are, of course, the cynics about GlencoreXstrata’s impending debut in Johannesburg.
“You
want the cynical view?” asked an UK analyst who follows the progress of
GlencoreXstrata. “There are going to be a lot of shares sold by
management in the years to come, and they need a market for those
shares.
"It’s our money like it’s your money”
“In
London, there are options: Antofagasta, Randgold Resources; in
Johannesburg, everyone is going to have shares in the company,
especially if you’re a tracker fund (obliged to invest in the biggest
companies),” the analyst said.
The other view is that
GlencoreXstrata is positioning itself for another tilt at Anglo
American, notwithstanding the anti-trust issues that might be thrown in
the way of such an acquisition.
From a political perspective,
buying Anglo American when you’re already listed in Johannesburg does
not seem to be ‘exporting’ the company at all so much as augmenting it,
GlencoreXstrata may argue should it ever put the transaction before
Government officials.
“They [GlencoreXstrata] could offer
South African shareholders in Anglo paper instead of cash which would
have been the case if GlencoreXstrata had only been listed offshore,”
said Pleming.
Were this to be the case, Glasenberg would see
GlencoreXstrata succeeding where Xstrata under its former CEO, Mick
Davis, failed. His merger of equals with Anglo Ameican was foiled after
SA shareholders asked for cash at a premium. “At least GlencoreXstrata
would have that option,” Pleming added.
A bid for Anglo is
popular speculation, especially during the heat of the commodity market
bull run, but it has less credibility these days. Glencore has already
bought Xstrata with its large South African coal footprint which would
make a combination with Anglo less palatable from a competition point of
view.
“It’s not a foregone conclusion,” said Henk Groenewald,
an analyst for Coronation Asset Managers. “And there’s other assets of
Anglo American Glasenberg wouldn’t want,” he adds. More likely,
Johannesburg provides GlencoreXstrata with an eager market.
“There’s
a large amount of capital in South Africa, and it’s a market that knows
mining which you can’t say so much about New York and even London,
where mining is only a small part of the overall market,” he says.

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