MAC/20: Mines and Communities

Glencore tries pulling itself up by metal straps

Published by MAC on 2009-05-27

It could hardly get worse for Glencore, the world's biggest commodity trader whose private investments in metals and mines are unrivalled

With first quarter profits this year toppling by more than two-thirds, the Swiss company had to sell its Prodeco coal mines in Colombia to Xstrata in March, while suspending some other mining operations.

This criris has spurred the extremely secretive company (it doesn't issue any public statement of accounts) to look for massive tranches of new bank loan and revolving credit. Just how much these gambits will cost the company is a matter of considerable speculation. Glencore is also resorting to credit default swaps - one of the key potentially toxic "derivative instruments" which lay at the heart of the 2007-1008 credit collapse.

Any optimism by the company is, of course, dependent on a major recovery in metal commodity prices.

Glencore is now set on its biggest-ever gamble ...

Glencore Profit Falls 69% After Commodity Price Drop

By Brett Foley

Bloomberg

19th May 2009

Glencore International AG, the world's biggest commodity-trading company, posted a 69 percent drop in first-quarter profit after metal and energy prices fell.

Net income before attribution to shareholders and adjusting for minority interests slid to $444 million from $1.42 billion a year earlier, the Baar, Switzerland-based company said in a report obtained by Bloomberg News. The company had about $3.8 billion of cash and undrawn revolving credit facilities as of March 31, compared with a minimum liquidity target of $3 billion, it said. Liquidity was $5.3 billion at Dec. 31.

Glencore, led by Chief Executive Officer Ivan Glasenberg, had its credit rating cut to the lowest investment grade in December by Standard & Poor's because of plunging metal prices. The employee-owned company said in March that senior staff agreed to delay future termination payments until at least January 2012 in an attempt to strengthen its finances.

"Earnings and cash flow levels were on the weak side," Henri Alexaline, a credit analyst at BNP Paribas SA in London, said today by telephone. "Maintaining an investment-grade rating will require more efforts than envisaged, but is still achievable." The company doesn't publicly disclose information about its financial performance on a quarterly basis, spokesman Marc Ocskay said today in an e-mail. He declined to comment on the credit rating.

Shut Mines

Credit-default swaps on Glencore cost 9 percent upfront and 5 percent a year, according to CMA DataVision prices today, down from 10 percent yesterday. That means it costs $900,000 in advance and $500,000 a year to protect $10 million of bonds from default for five years.

Glencore shut the Rosaura zinc mine in Peru in December and said in March output was suspended at the country's Iscaycruz zinc mine. Zinc for immediate delivery on the London Metal Exchange averaged $1,183 a metric ton in the first quarter, 52 percent lower than a year earlier. Copper and aluminum, which Glencore also produces, dropped 56 percent and 50 percent respectively. Crude oil declined 56 percent.

Sales declined 50 percent to $20 billion. Net income was more than four times the $105 million posted in the fourth quarter.

The company's marketing unit accounted for 77 percent of gross income and industrial operations the rest, according to the report. "Profitability at the industrial division has been impacted by the low commodity price environment, with ensuing margin contraction," Glencore said in the report.

Loan Accord

Glencore signed $7.5 billion of loans last week with 35 lenders, extending the maturities of its bank debt to 2012. The accord proves Glencore has "solid access to financial resources well in excess of their short-term maturities," Alexaline said. The company's liquidity "remains strong," he added.

The trader sold the Prodeco coal assets in Colombia to Xstrata Plc for $2 billion in March 3, using the proceeds to participate in Zug, Switzerland-based Xstrata's 4.1 billion- pound ($6.3 billion) rights offer. Glencore is the largest investor in Xstrata, which reduced production after prices fell and said in January it wouldn't pay a final dividend.

Glencore controls mines and smelters on five continents and also trades grains. It also has a 9.7 percent stake in Russian aluminum producer United Co. Rusal, according to Glencore's Web site.


Glencore Said to Agree to Refinance $5.5 Billion Loan

By Patricia Kuo and Brett Foley

Bloomberg

14th May 2009

Glencore International AG, the world's largest commodities trader, agreed to more than $5.5 billion of loans to refinance debt, two people involved in the deal said.

The company will pay an annual spread of 225 basis points more than the London interbank offered rate for more than $5 billion of a three-year forward-start loan. It will also pay 200 basis points over Libor on $500 million of a 364-day revolving credit, said the people, who declined to be identified before an announcement.

Glencore, which trades oil, metals and agricultural commodities and controls mines and smelters, said in March net income fell 8.4 percent to $4.75 billion in 2008 as the global economy slowed. The S&P GSCI index of 24 raw materials has advanced 16 percent this year as governments from the U.S. to China implemented measures to ease credit markets. "We've seen a resurgence of interest in the commodity sector" helped by "global synchronized monetary easing," said Louis Gargour, chief investment officer at LNG Capital LLP, a London-based hedge fund.

Baar, Switzerland-based Glencore, which is owned by its employees, received offers from lenders for more than the $5.5 billion it sought, the people said. Spokesman Marc Ocskay declined to comment.

In a forward-start facility a borrower locks in a new credit line before its current agreements expire. They typically offer banks a one-time payment, higher fees and increased interest rates, or a combination.

Higher Interest

The new facilities will help Glencore renew in advance an $8.2 billion loan maturing in 2011, and extend a $925 million one-year revolving credit line. The company agreed in 2008 to pay interest of 42.5 basis points over Libor for the longer- dated loan and 40 basis points over the benchmark rate for the short-term facility, according to data compiled by Bloomberg.

In a revolving credit facility, money can be borrowed again once it's repaid; in a term loan, it can't.

Stemcor Holdings Ltd., the world's largest independent steel trader, is paying 250 basis points over Libor for a $480 million loan signed earlier this month, according to a statement from the company. A basis point is 0.01 percentage point.

Glencore's new transaction is being arranged by Barclays Capital, BNP Paribas SA, Calyon, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Fortis, HSBC Holdings Plc, ING Groep NV, JPMorgan Chase & Co., Lloyds TSB Bank Plc, Rabobank Nederland NV, Royal Bank of Scotland Group Plc and Societe Generale SA, the company said in April.

Default Risk

The cost of protecting Glencore's debt against default declined today, according to traders of credit-default swaps.

Contracts on Glencore fell 1 percentage point to 13 percent upfront, according to CMA DataVision prices at 10:55 a.m. in London. That means it costs 1.3 million euros in advance and 500,000 euros a year to protect 10 million euros of Glencore bonds from default for five years. The swaps traded as high as 44.5 percent upfront in December, CMA prices show.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Copper fell 3.4 percent today on speculation U.S. jobless claims increased.

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