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Glencore is in a hole, but it keeps on digging

‘If you leave aside the legal woes, it would be hard to make the case that Glencore’s shares are overvalued.’
Glencore's move to buyback shows that it does not fear the call from the DoJ. Picture: Simon Dawson, Bloomberg

Glencore Plc’s announcement of a $1 billion stock buyback on Thursday was short on both wit and colour. So allow me to hazard a rough translation: “Don’t worry, we’re rich and our share price should be much higher.”

Faced with the unwelcome attention of the US Department of Justice, most companies would be inclined to batten down the hatches. But, just a couple of days after being ordered to hand over a decades’s worth of documents related to its activities in the Democratic Republic of Congo, Venezuela and Nigeria, the world’s top commodities trader is splashing its cash.

Glencore does bravado well – too well, perhaps, for its own good.

Read: Glencore announces share buyback of as much as $1bn

Two recent examples are pertinent: not long after the Baar, Switzerland-based company had overcome a nasty tussle with short-sellers, CEO Ivan Glasenberg quipped last year that the balance sheet was now in such good shape that his firm could afford to pay a $20 billion dividend. And earlier this year, Glencore announced it would restart royalty payments to its former Congo business partner Dan Gertler – even though he had recently been made subject to blocking sanctions by the US. The company’s solution was to pay Gertler in euros, a possibly unwise move even if Glencore says it had discussed the matter with US authorities.

Compared to the now famous $20 billion boast, today’s buyback and the $2.9 billion of dividends Glencore is promising shareholders this year look pretty modest. But, they send a signal that Glasenberg, who own 8% of the stock, thinks the recent sell-off is overdone and the company’s balance sheet is more than capable of withstanding a bit of legal trouble.

Source: Bloomberg

Indeed, if you leave aside the legal woes, it would be hard to make the case that Glencore’s shares are overvalued. Providing commodity prices don’t collapse, analysts expect the company to generate about $54 billion of Ebitda in the next three years. With net debt down to about $10.7 billion, and its capital expenditure requirements fairly limited, that should leave plenty of spare cash to return to shareholders. Yet the stock only trades on about eight times estimated earnings, a steep discount to peers BHP Billiton  and Rio Tinto.

That gap exists because Glencore is seen as a more risky proposition: it’s also facing a possible corruption probe in the UK and its troubles in the Congo are too copious to list here.

Perhaps Glencore decided to proceed with the buyback to show it has nothing to fear from the Justice Department. But external investors, who aren’t privy to the same information, will struggle to share that confidence. The DoJ struck back at Glencore less than a month after the miner’s apparent attempt to circumvent US sanctions. It’s hard not to conclude the company misjudged the situation. In business, as in life, pride can often come before a fall.

© 2018 Bloomberg 

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