After a hearty dead-cat short-cover bounce, Glencore – aka “Glenron” – stock appears to be headed quickly south again:
After a flurry of rumors about debt buybacks, asset sales and possible buyouts, it looks like the reality of gravity has gripped Glencore’s stock again, as Glencore’s stock bounced up to its plunging 50-day moving average and quickly headed south again.
A lot of unfounded assertions and articles written without factual references have surfaced, so I did a quick “drive-by” view of Glencore’s financials and recent presentations to get some truth. To begin with, 36% of Glencore’s operating income (EBIT) is derived from copper. Here’s what a long term copper chart looks like:
I don’t know about anyone else, but it appears to me that the global economic conditions are headed back down to where they were in 2008/2009 and probably even lower. That implies that the price of copper has a lot further to fall. Another 17% of Glencore’s EBIT is derived from zinc, nickel and coal. All three commodities are close to or at very long term lows, with no bottom in sight.
I think it’s fair to say that the downside risk to Glencore’s cash flow is greater than the likelihood of upside potential at this point.
As for Glencore’s debt load. In the latest management presentation, management stated the one of its goals is to maintain a “strong investment grade rating.” This made me laugh. Why? Because Glencore’s debt rating is triple-B flat (BBB/Baa). This is two downgrades away from being considered “junk.”
Original reports were that Glencore had “net debt” of $29 billion at the end of June. But let’s examine the truth before we become poisoned with propaganda. As it turns out, Glencore was carrying $50 billion of funded debt at the end of June (bonds + funded credit lines):
The graphic above is from Glencore’s 1st Half financial report. As you can see, the “$29 billion” is derived by netting out Glencore’s “readily marketable inventories.” It’s a number used by Wall Street’s snakeoil salesmen and their financial media propaganda vassals (Steve Liesman, Joe Lavorgna, Jim Cramer, Mark Zandi, etc). If these inventories are “readily marketable,” then how come Glencore does not readily sell them and pay down its debt?
Because the answer is that the inventory consists of copper, zinc, nickel and coal, all of which are in abundant supply with falling prices. The “net debt” number is therefore highly misleading and the real debt level is $50 billion, which means that Glencore is de facto a junk bond credit.
As an aside, the other day some dweeb from BlackRock, Evy Hambro, announced publicly that he backs Glencore’s big debt reduction “plan.” Of course he backs it – BlackRock is the fourth biggest holder of Glencore’s stock and undoubtedly one of its largest non-bank creditors. Tell me Evy, if Glencore’s plans are executable, why don’t they start by raising $17 billion from the “readily marketable inventory?” “Readily” means you can sell it all into a deep market bid now.
$50 billion in debt on top of what will likely be about $8.5 billion of EBITDA and likely about $2.5 billion after CAPEX for all of 2015. Glencore’s debt level, in other words, is In other words, is 20x cash flow after capex. This is a staggering ratio. It is likely that Glencore’s cash flow will continue to decline along with commodities prices and the economic contraction in China. Glencore has thus entered the realm of the Irreversible Debt Spiral.
I remember the Enron saga vividly because I was short the stock from about $42 down to where it bounced. At which point I covered and after the bounce was over I re-shorted Enron until it went below $10. I’m not suggesting that Glencore is going to be completely incinerated the way Enron was, but there’s certainly a lot of questionable events behind the “curtain” that covers Glencore, going all the way back to the time when Glencore existed as Marc Rich’s commodity trading company. I would suggest that anyone who might be exposed to the stock or the debt of Glencore should get out of the way, because Glencore certainly does not pass the “smell test.”