A battle is raging in the City over the fate of Glencore, the heavily indebted mining and commodities trading group that suffered an extraordinary 30 per cent collapse in its shares at the start of the week.
After a day of tumultuous trading, Glencore shares had slithered to a record low of just 68.5p by the close of play on Monday as investors rushed to dump the stock. That compares with a price of 530p when the company floated on the London market at the height of the commodities boom four years ago, when it was accorded a value of £38 billion.
City veterans tried to recall a FTSE 100 company ever having a worse day, but couldn’t come up with much.
Cheap debt
Behind the rout was a blistering research note from analysts at
Investec
, who warned that the group could see its entire value wiped out if commodity prices remained at their current depressed levels, and if Glencore failed to reduce its mountain of debt.
“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 crisis. The consequences are only now coming home to roost . . . ” said Investec analysts Hunter Hillcoat and Marc Elliott.
It wasn't just Glencore that Investec targeted. The analysts warned that, in the absence of substantial restructuring, nearly all of the equity value of both Glencore and Anglo American could "evaporate".
Shares fell across the entire mining sector, propelled additionally by more gloomy industrial news from China.
It may have been the Investec note that sparked Monday’s panic, but there were already deep-rooted worries in the City over the future of Glencore, which is struggling under debts of some £20 billion.
Earlier this month, analysts at Goldman Sachs warned that the group’s financing costs would soar if it were to suffer a downgrade in its credit rating.
The group's combative boss, billionaire Ivan Glasenberg, has repeatedly insisted Glencore has no need of restructuring. But, after the shares more than halved this year, he unveiled a debt-reduction and cash-raising plan a few weeks ago, including scrapping dividend payments and plans for a series of asset sales to raise funds.
If that was intended to reassure the City, however, it failed dismally, and the slide in the shares gathered pace.
Glencore stayed ominously silent on Monday amid the market bloodbath. On Tuesday morning, Legal & General chief executive Nigel Wilson warned that the group faced a “quasi-Lehman moment”. He criticised its lack of response: “There’s a lot of noise and not enough signalling,” he said, urging the group to speak directly to analysts and investors.
‘Overdone’
By Tuesday afternoon Glencore had put together a statement in which it assured the market its business “remains operationally and financially robust” with “no solvency issues”.
There was support, too, from analysts at Citigroup, who produced a note to counter the Investec gloom. According to Citi, the market response is “overdone”.
That support, along with the company statement, went some way towards shoring up the stock. But, after Monday, former coal trader Glasenberg might wish he could take the company private again. But the debt piled up since the float would make that a tough move to pull off. Fiona Walsh is business editor of theguardian.com
