Glencore International Plc (stock codes: GLEN.L and 805.hk) is a very powerful commodities giant with headquarter in a district known for its low taxes in Switzerland.
Do you, however, fully understand the business nature and relevant risks carried by this mega company?
According to Reuters, Glencore is by now the world's biggest physically moving commodities trader. The scope and scale of Glencore's global operations are truly remarkable: they mine, refine, supply and also trade. This commodities giant, as disclosed in its IPO prospectus, is actually dominating the supply chain of many major commodities. Such a strong supply chain helps satisfying the growing global energy demand and facilitate infrastructural projects in emerging markets like China, Brazil, and India. With a weak dollar, widespread sovereign debt crisis, global inflation expectation risk, and black swans, most people truly expect that they can bank on this commodities rally.
Glencore is in fact much more than just a commodities trader, it also owns a large number of publicly listed companies such as 34% stakes in Xstrata, the world's 4th biggest copper miner and 5th largest nickel producer.
Although Glencore does not drill oil on its own, it handles the supply of around 3% of daily global oil consumption. Despite this critical role in worldwide commodities supply chain, until recently Glencore remained secretive.
In late May 2011, it launched an initial public offering (IPO) of up to 20% of its total shares, in London and also Hong Kong (stock codes: GLEN.L and 805.hk).
Listing publicly on a stock exchange means that, for the first time in its 37-year history as a private company previously, one may expect Glencore's global operations can then be scrutinized by investors and regulators more easily. According to its IPO prospectus, Glencore recorded an EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $6.2 billion in the last year 2010. Glencore already carried with an entry ticket to be included in the FTSE 100 index after its first unconditional trading day in London. Since a lot of U.K. pension, tracker and exchange-traded funds (ETFs) will have to buy automatically afterwards, Glencore's IPO bookrunners must have enough firepower to ensure a successful IPO listing.
While there has been much discussions over risks whether Glencore's IPO may mark the near-term peak of the current commodities boom, on 1 June 2011, just a few days after its IPO listing, the European Investment Bank (EIB) announced to freeze all new loans to Glencore over concerns about the commodities giant's corporate governance. The EIB, an European Union's lending institution, did provide $50 million loan in 2005 to Mopani Copper Mines, a Zambian subsidiary of Glencore, for the modernization of its copper smelter. Mopani has been accused by some non-governmental organizations (NGOs) of tax evasion and of causing widespread pollution. The Swiss-based giant Glencore has then denied the allegations confidently that it will be exonerated. Mopani itself has also posted advertisements in local Zambian mass media to reject claims made in an draft audit on their sales volumes, manipulated copper prices and also improperly recorded hedges, by saying the audit conclusions were based on errors and inconsistencies. The European Investment Bank (EIB), however, trends to believe the risk of Glencore's corporate governance is serious and go far beyond just Mopani. It has therefore decided to decline any further financing request from Glencore or anyone of its subsidiaries.
Perhaps the above EIB's story just reflects the business nature of the secretive Glencore: High Risks, High Rewards. Their stakes in Katanga Mining, which operates in the Democratic Republic of the Congo (DRC), is another prime example. Although Congo is full of natural resources, some of its metals may never be able to deliver to the market owing to the political instability in the region. In fact, the relatively high commodity prices and other political risks in recent years have resulted in the increased resource nationalism in some countries like DRC, with governments renegotiating or repudiating contracts with, and expropriating assets from companies which are producing or operating in these countries.
We do expect, as the risk of increased scrutiny for the secretive company after its IPO listing, Glencore's stock price (GLEN.L and 805.hk) will have to be volatile. And if you expect a quieter life, you may consider to just keep clear of Glencore.
There are better opportunities available elsewhere that carry less risks, even from the same industry. Simply by looking at last year's data, Glencore's revenues of $145 billion only produced a net profit of $3.8 billion. Xstrata, the company which Glencore may merge with, however, had revenues of a just $30.5 billion but resulted in a net profit of $5.4 billion. Even if the M&A does not happen, the kind of commodities that Xstrata has been exposed is still impressive and the returns could be better by buying shares of the potential prey (Xstrata XTA) rather than the predator (Glencore GLEN.L).