Glencore shares hinge on debt progress

Glencore shares have almost doubled from lows seen on the now infamous day in September 2015 when they tanked as much as 46%.

Ahead of its final earning release from a horrendous year, its remarkable share price bounce shows the global mining No.4 by market value is ‘off the floor’.

But no one expects it to unveil sparkling results on Tuesday.

Instead, like its largest rivals, which have all given grim account of their past fiscal year already, seismic value destruction is expected from the Anglo-Swiss mining and trading conglomerate, perhaps including eye watering write-offs.

In our view, the market is likely to react most strongly to any news on Glencore’s progress in cutting above-peer-average net debt.

Net debt vs. ‘Readies’

Controversy continues to surround the exact size of that debt.

Before its stock imploded last autumn, Glencore had typically steered analysts to a calculation of net debt that was also net of what it called ‘Readily Marketable Inventories’ (RMIs).

‘RMI’ is the Glencore term for commodities which, in its view, could be liquidated swiftly.

The group assumed it could state its headline debt figure as if these commodities—worth about $19.5bn on its balance sheet in October—didn’t exist.

Glencore’s net debt figure by its own reckoning was around $30bn.

The latest data we can dig out from Thomson Reuters Eikon, shows that if the value of RMIs were treated as irrelevant for Glencore’s net debt at the end of its third quarter, the figure would still have been about $47bn.

You’d think the last few months would have taught Glencore to be more upfront with the markets about its debt and credit.

To an extent it has.

Nevertheless the group has remained coy about its precise net debt, with or without RMIs.

Even after raising $2.5bn by selling new shares in mid-September, scrapping its dividend and establishing “a net debt target of US$27 billion by the end of 2016.”

At the same time, the sensitivity of Glencore shares to the group’s credit situation was underlined earlier this month by a double-digit share price jump after it said it raised available credit by $8.4bn as part of a refinancing.

In short, whilst damage to Glencore’s profits might well be contained within grim expectations, investors will pore over its progress on the main means by which it can reduce debt: disposals.

Among mooted asset sales, its stakes in agricultural and copper mining businesses may be watched the most.

Any balance sheet impairments (particularly in nickel mining) and the final free cash flow balance will also be big focus points.

Glencore’s 2015 EBIT guidance for its ‘so-called’ marketing division, AKA its trading arm has latterly been $2.4bn-$2.7bn.

Here is our list of key full-year (FY) forecasts:

• FY 2015 revenue: $164.2bn; down 26% year-on-year (Y/Y)
• Underlying EBITDA: $8.64bn; down 32% Y/Y
• Depreciation & Amortisation: $5.8bn after $5.4bn in FY 2014
• EBIT: $2.48bn, down 63% Y/Y
• Reported pre-tax profit: $230m, down from $4.25bn in FY 2014

In view of still febrile trading interest in Glencore—its shares have been a mainstay among the FTSE’s most-shorted shares since September—our list of ‘key forecasts’ could well have been longer, depending on tolerance for detail.

Either way, any major variance in Tuesday’s results from the additional forecasts below, will also have a significant share price impact.

• Total commodity inventory: $20.8bn, down 14.6% Y/Y
• Net debt (‘Glencore basis’): $32.9bn vs. $30.5bn at FY 2014
• Operational cash flow: $12.7bn, up 56% Y/Y
• Free cash flow (FCF): $7.6bn, after negative FCF of $679m in FY2014
• Total capital expenditure: $5.1bn, down 41% Y/Y
• Total capital expenditure forecast for FY 2016: £3.5bn