“The markets response is overdone,” said Citigroup, which helped Glencore to list in 2011 and has participated in many key deals since.
“In the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly.”
The
commodities giant could eventually separate its industrial
assets from the trading operations if it was private, analysts at
Citigroup said in a report dated Monday. While Glencore shares fell 29 percent yesterday, Citigroup called the stock attractive
because it’s cheap and the company doesn’t have a stressed balance
sheet. Glencore shares rebounded 10% on Tuesday.
"Mining companies gorged themselves on cheap
debt in a race to grow production following the Chinese stimulus that
occurred in the wake of the (global financial crash)," Investec analysts, led by Hunter Hillcoat, said in a note on Monday
morning.
"The consequences are only now coming home to roost, as mines take a long time to build."
Glencore had a higher debt base than its counterparts and a lower-margin asset base, Investec said adding that its debt levels would still be above its rivals despite an intense period of restructuring over the next five years.
Analysts detailed a scenario of weakening commodity prices - which is not its base case scenario - where they see an almost total crash in potential earnings for Glencore as the firm would be solely working to repay debt obligations. Under this scenario, shareholder value would be totally eliminated.
Citigroup noted that even with copper at $4,000 a metric ton and other raw-material prices stable, Glencore would post earnings before interest, taxes and amortization of about $7.5 billion.
Glencore
is now pressured to strengthen its balance sheet through asset sales or
a capital injection, and time is crucial, Jefferies Group LLC
said in a report on Tuesday.
“There is value in Glencore shares if the company can pull the appropriate levers now, but risks are clearly very high,” it said, giving the stock a “hold” rating.
Citigroup and Credit Suisse Group AG were hired by Glencore to sell a minority stake in its agricultural business, Bloomberg said citing a person familiar with the matter. The planned sale is part a broader raft of changes that include selling $2.5 billion of new stock and slashing the company’s debt to $20 billion from $30 billion.
“The group is not
limited to just selling a minority stake and if the need be, the entire
agricultural-marketing business could be sold, which we value at about
$10.5 billion,” Citigroup said in the report on Monday, adding that the level of interest will likely be high.
Citigroup also added that it is unlikely that Glencore’s credit rating will be reduced below investment grade. If this happens, however, Glencore’s rivals will keep trading with the company, it said.
