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Article / 28 September 2015 at 11:56 GMT

Glencore shares hit sub-£0.71 as abyss beckons

Managing editor, TradingFloor.com / Saxo Bank
Denmark
  • Glencore share price loses nearly 25% in London trading
  • More than £2 billion wiped off the value of the global commodities trader
  • Swiss-based giant already tried to ward off crisis with $2.5bn share placement
  • 85% wiped off the value of Glencore stock since start of 2015
  • Glencore shares directly affected by global commodities pricing slump

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That copper lighting is very striking, but the fall in prices this year is just one reason
why global commodities giant Glencore is facing a huge crisis. Photo: iStock


By Martin O'Rourke

Swiss-based Glencore is engulfed by a crisis that threatens to send the global commodities trader and miner towards a deep, dark abyss from which it may struggle to return.

The approximate 25% plunge in the share price to a record low during the London morning trading session was sparked ostensibly by a note from financial products specialist Investec that had the starkest of warnings for the trading giant that "highly leveraged companies, such as Glencore....[could see] their much diminished earnings absorbed by the obligation to debtholders."

Understated that may be, but the devastation has been huge.

Glencore's share price fell to a record low of £0.7071 at approximately 1030 GMT before gaining some traction in the last hour, north of £0.7500. The share price was at £0.7719 at 1154 GMT.

To put that in context, the commodities oil trader that could seem to do no wrong was trading at more than 500 pence in 2011. It's an astonishing demise.

Glencore's been on a one-way street in London trading this morning.f

 Source: SaxoTraderGO

"Our view last week was that the 100 level represented elevated risk of bankruptcy which we find was out of touch with reality as China is still growing and supply is being cut," says Peter Garnry, head of equities strategy at Saxo Bank.

"However, Investec’s report this morning that the stock could be worthless if commodity prices stay flat from here hit a nerve among investors and the stock has been sold off ever since," he says. "The chart shows the blood that has been spilt in Glencore shares."

It's a similar view from London where Saxo Bank equities trader Adam Seagrave reckons this was a calamity that was waiting to happen. "Glencore’s business model was not stress tested for this kind of move in commodity prices," he says. "The recent restructuring it carried out will need to be revisited if spot prices remain at these levels for much longer."

Glencore earlier this month issued a share placement of $2.5 billion to try and ward off a crisis.

"The commodity market has experienced a perfect storm in terms of a slowdown in demand and the simultaneous growth in supply," says Seagrave. "Assuming a gentle/low recovery of commodity prices through 2016, analysts have begun looking at Glencore’s debt levels as its eats into profit and in turn equity value."

And what a slowdown. Oil has been well-documented of course and it is instructive to note that the share price fall began in earnest around the third quarter of 2014 when it was well in excess of 350 pence and then gathered pace once Opec set sail its supply-and-rule strategy at the now infamous meeting from end-November 2014.

Another crashing commodity that directly impacts Glencore has been copper which has slipped by a third since the autumn of 2014.

Copper has fallen from above $3.20/lb a year ago to around $2.25/lb

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Source: SaxoTraderGO

Of course, those of you who like to seek out a bargain might be noting that the share price has already climbed back to the £0.7700 level.

But any profit taking should proceed with the utmost caution, warns Garnry.

"If the stock does not rebound significantly all the commodity trader’s banks will begin to require asset sales to recover values backing the $50 billion in debt outstanding," he says. "The minority sale of its agriculture unit is a step in that direction."

Whatever road Glencore takes, it looks like a long hard one back to former glories.

Martin O'Rourke is managing editor at TradingFloor.com

2y
Sam Me Sam Me
Not much time left till Glencore looses investment grade rating... And than? How reasonable is a default, and how will it affect commodity prices ?
2y
Clare MacCarthy Clare MacCarthy
My guess (and it's only a guess) is that default would be a long way off. Sure, commodities are in meltdown. And sure, Glencore is carrying a load of debt. But it's still got great assets some of which could be peeled off first, if necessary. Lenders, as a rule, aren't fools – they dislike cutting their losses and running away with peanuts.
2y
Martin O'Rourke Martin O'Rourke
Glencore's share price has continued to plunge after that all-too-brief recovery to slide below 70 pence for a low of 69.01 pence in the last 10 minutes and a 29% on-day fall. The share price has since managed to return above 70 pence to be at 70.30 at 1225 GMT.
2y
Martin O'Rourke Martin O'Rourke
1227 GMT and it's a fresh record low of 69.00 pence
2y
Clare MacCarthy Clare MacCarthy
And Glencore's not the only commodity-related company hitting the headlines right now. FT.com's front page has:
"Shell abandons contentious Arctic exploration after poor results"
"Alcoa splits into mining and metal groups"
and "Swiss regulator probes banks’ possible precious metals collusion"
2y
Martin O'Rourke Martin O'Rourke
Scrub that last record low from your book. Glencore has since slumped to 66.67 pence for an on-day fall of more than 31%. The price is currently at 70.41 p as the price continues to yo-yo in and around the 70 p mark.
2y
Martin O'Rourke Martin O'Rourke
This comment has been redacted
2y
Martin O'Rourke Martin O'Rourke
Glencore's up nearly 10% Tuesday morning to 75.39 at 0920 GMT. That's some crumb of comfort for the beleaguered commodities trader, but it still has a long way to go to restore confidence.
2y
fxtime fxtime
So do you regard their is value in Glencore?
Net debts of approx $30bn
Short term Credit facility can max upto $10bn
Recent equity placing gainsayed $2.5bn
Long term debt equates to $12bn
FRee Cash Flow (positive) at $3bn current value
Net debt depending on commod values yused is between 3 and 5 times before EBITDA
Certainly the equity price is in a toxic spiral as sentiment dissappears but funds flow suggests Glencore is still solvent...just.
2y
Martin O'Rourke Martin O'Rourke
I report fxtime and let the experts handle the weightier matters :-)
2y
fxtime fxtime
LOL :-)
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