The surprised analyst who sparked a $55 billion ASX selloff
The analyst at the centre of a global commodity selloff is as surprised as anyone at the savagery of the mining stock slump that followed the publication of his research note on commodity company Glencore.
Tuesday’s market turmoil in Australia, chiefly amongst mining and energy stocks, was sparked by an analyst note from Investec Securities in London on Monday.
It argued Glencore’s equity value could be wiped out if metal prices remain at current levels.
Within hours 30 per cent was slashed from the value of the Swiss-based miner in London trading. In London trading on Tuesday, Glencore pared back a portion of those losses with its shares closing nearly 17 per cent higher.
“We were surprised by the reaction. It was well beyond what we had expected in that it was just a scenario but clearly it hit a nerve in the market,” said Investec analyst Hunter Hillcoat, the author of the Glencore note, who told Fairfax Media on Tuesday he did not expect such a savage sell-off.
“The question we posed was if prices do not improve, if this is as good as it gets, then what for Glencore and hence the suggestion that the equity value for the company disappears.”
BHP and Rio different
Mr Hillcoat said BHP and Rio were in a much stronger position than Glencore, although he cautioned that the two Australian miners may struggle to retain their progressive dividend policies if commodity prices remain depressed.
“If prices weaken, it does not make sense to handicap the long term growth potential of the companies by paying out earnings in the short term, so clearly they may have to revisit those policies.”
But Peter Coates, a non-executive director of Glencore, said he expected the broader mining industry to rebound from its current lows and maintains the long-term fundamentals remain strong.
“Obviously the resource industry is going through a very difficult period and all resource companies are feeling the pain,” said Mr Coates, who is also executive chairman at energy producer Santos.
“We are going through a period where everyone’s confidence is down particularly in relation to China. There’s a very bearish attitude in the market at the moment but in the long-term I have great confidence in both China and the commodities outlook.”
Balance sheet focus
While he declined to discuss any specifics on Glencore, Mr Coates told Fairfax Media there was a huge focus within the industry on improving balance sheet positions given the uncertain outlook.
“When revenues are down and balance sheets have got a lot of debt on them, life is more difficult. But it goes in peaks and troughs and I expect the market to pick up again.”
After lobbing a $US160 billion merger proposal for Rio Tinto in July 2014, swiftly rejected by the Anglo-Australian miner, Glencore chief Ivan Glasenberg has suffered a dramatic fall in fortunes.
Investors have grown increasingly concerned about Glencore’s high levels of debt as prices for its key commodities including copper, coal and oil have continued to decline.
That pressure forced Glencore in early September into a $US2.5 billion equity raising with the trading giant also suspending its dividend until further notice.
Glencore’s $500 million September 2019 Australian dollar bonds were savagely sold off on Tuesday, falling 1.75 per cent in a single session, pushing the yield up to 5.4 per cent, up from 4.3 per cent in mid-August.
The fall in the commodity traders bonds’ comes as investors fret that plunging commodity prices could result in Glencore losing its investment grade credit rating, which at BBB is two notches above junk.
The company is now focused on cutting its $US29.6 billion net debt by about a third as part of its new remedy plan to grab $US10.2 billion in savings.
It has also embarked on a review of assets which could be placed on the market potentially including some of its Australian mines.
Glencore operates more than a dozen coal mines in NSW and Queensland and is the world’s largest seaborne exporter of thermal coal. It also owns copper, nickel and zinc assets in Queensland and the Northern Territory and Western Australia.
Citigroup on Tuesday said one option for Mr Glasenberg was to consider again taking the company private “whereby restructuring measures can be taken easily and quickly with a potential float of just the industrial business occurring further down the track”.
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