Glencore Adapting to Current Landscape

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Shares of Glencore (LSE:GLEN) rose more than 7% to close at 131.80 on the London Exchange today when it released an update on its aggressive plans to reduce its net debt and “adapt the business to the current commodity landscape.” The move is much the same as Lord Nelson would have done with HMS Victory, trimming his sails with a storm close at hand. It would have been an indication to others that it was time to do the same.

It’s Called Preparation

Although Glencore is still floundering near its 52-week low of 121.80, a mere 35% of its 52-week high of 371.80, a fluctuation in its £17 billion market cap  is sufficient to affect the FTSE 100 index. In this case, the 27th-ranked constituent helped the index to close up a modest 0.5% at 6,074.52.

Proposed Glencore Actions

The boards proposals are in addition for those actions proposed on 19 August which included a half billion dollar reduction in capex for 2015 and a $1.6 billion reduction for 2016, targeting a net debt ot $27 billion by the end of 2016. The company’s current debt load is $50.6 billion.

The new measures include:

  • Raising $2.5 billion in a new equity round. Senior management has collectively agreed to acquire 22%, or $550 million, as a show of confidence in their own decision-making process.
  • Suspension of dividend payments for an indefinite period of time.
  • A significant reduction in working capital.

A statement by senior Glencore executives said that they remain “very positive on the long-term outlook for our business,” and that these moves are being made to boost investor confidence during uncertain times. None of the measures affect Glencore’s core business activities.

The statement said that the actions have been proposed in preparation for a potential prolonged weaker pricing environment.

  • designed to sensibly accelerate the deleveraging of our balance sheet
  • maximise future cash flow generation in the current weak commodity price environment
  • substantially improve our financial and credit metrics, stability and strength

Shareholder Perception Is Everything

CEO Ivan Glasenbrg told reporters that, “We kept getting asked the same question by investors … ‘What happens if commodity prices drop further?’” Astute leadership listens. Astute leadership understands when investors are nervouse. Brilliant leadership makes strategic moves that allay investor fears, regardless of whether or not they are well founded. To wit, Glasenberg added that, “We wanted to bullet-proof the balance sheet.”

Early investor response appears to be positive.

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