Industry Trend Analysis - Glencore's Plan: Key Implications - OCT 2015

BMI View : Glencore's strategy to reduce the firm's net debt through issuing equity, slashing working capital and divesting assets will strengthen the firm's financial positio n. Despite this, the company's exposure to weak commodity prices will prevent a turnaround of the firm's share price over the long term . Glencore's increasing focus on supply discipline will result in a significant decline in Zambian and DRC copper output growth .

On September 7, 2015, Glencore announced that the company will reduce its debt-load from USD30.0bn to USD20.0bn by the end of 2016. This is a significant revision as Glencore previously announced in Q115 that the firm would cut debt by only USD3.0bn to USD27.0bn. The revised plan comes after an outlook downgrade from neutral to poor by Standard & Poor's (S&P) on September 2, 2015, following rising investor concerns about the company's profitability in the current weak mineral price climate. Investors have been alarmed by the 46.1% decline in Glencore's share price since January 1, 2015. Over H115, the firm's net income declined by 56.0% to USD882mn, down from USD2.0bn in H114. In addition, the company's operating profit declined by 33.9% over H115. Despite this, the company's free cash flow grew from USD450mn in 2014 to USD5.1bn over H115 on the back of asset sales, including the Tampakan copper mine in the Philippines, the Falcondo nickel mine in the Dominican Republic and the Sipilou nickel mine in Cote d'Ivoire.

This article focuses on three key implications of Glencore's new plan: the implications for the company itself, the implications for the global copper sector, and for the respective countries copper sectors' involved.

New Strategy To Counter Downfall
Glencore - Share Price (USD, Weekly, LHS) & Market Capitalization (USDbn, RHS)
Note: End of year market capitalization. e= Bloomberg estimate. Source: Bloomberg

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