Glencore Ready to Snap up Assets after Profit Rebound

 

Analysts said the results beat expectations, driving the share price 2.7 percent higher by 1100 GMT, building on gains of nearly 20 percent so far this year. The wider sector was flat.

 

Companies across the mining sector, which was pounded by the commodity market rout of 2015, have exceeded expectations following a recovery in the price of raw materials such as iron ore and coal last year.

 

Glencore's earnings before interest, tax, depreciation and amortisation (EBITDA) were $10.3 billion, up 18 percent.

 

For the trading, or marketing division that sets Glencore apart from other miners, adjusted earnings before interest and tax (EBIT) were $2.8 billion, up 14 percent and above previous guidance of $2.5-$2.7 billion.

 

It now says, marketing this year should deliver between $2.2 billion and $2.5 billion in profit, adding the lower range reflected the sale of 50 percent of Glencore Agriculture in December 2016.

 

Glencore, like other miners, has embarked on asset sales to drive down debt and has said it will maintain a lower net debt to EBITDA ratio, a crucial measure of available cash in capital-intensive mining.

 

Chief Executive Ivan Glasenberg said that ratio could slip below 1 this year if no further acquisitions were made, compared with its goal of 2:1 and the 3:1 ratio it used to favour.

 

Net debt by the end of 2016 had fallen to $15.5 billion, a fall of $14.1 billion, compared with 18 months ago.

 

"Since our IPO in 2011 and subsequent acquisition and integration of Xstrata (XSRAF.PK), Glencore has never been so well positioned as it is today," Glasenberg said.

 

He told reporters on a call surplus cash could be used for small deals or "bolt-ons" on the edge of existing assets, rather than huge acquisitions, and perhaps big dividends.

 

"We could do many things. We could give our long-suffering shareholders a generous gift of a special dividend," Glasenberg said. "To ourselves as shareholders, that would not be a bad thing to do."

 

Glencore's board recommended on Thursday a dividend of 7 cents per share after promising late last year it would reinstate payouts.

 

A glitch in the recovery was the decision to hedge 55 million tonnes of coal in a rising market, which led to what Glencore labelled an "opportunity cost" of $980 million.

 

Glasenberg, however, said Glencore would carry on hedging as appropriate and was locking in coal prices with Japan over a year-long contract.

 

He was still bullish for commodity prices, predicting good demand from China, buyer of around half the world's raw materials, and that new supply would be offset by lower production from ageing assets as across the industry, miners spend conservatively.

 

He cited industry-wide figures that capital expenditure dropped from a peak of around $71 billion in 2012 to an estimated $25 billion in 2016.

 

"What started the negative vibe was increased supply," Glasenberg said. "The industry has changed."

 

Analysts said the results were ahead of consensus.

 

"Today's results strengthen our view on the stock. The results were solid," Bernstein wrote in a note, adding it rated Glencore "Outperform".