Glencore gets $1.8bn thumbs up

SOUTH Africans have invested about $1.8-billion (R19-billion) in Glencore since the start of the year, boosting its local ownership to 2.1%, still substantially below the 5% required for inclusion in JSE indices.

SOUTH Africans have invested about $1.8-billion (R19-billion) in Glencore since the start of the year, boosting its local ownership to 2.1%, still substantially below the 5% required for inclusion in JSE indices.

This means Glencore, with a market capitalisation of nearly R864-billion, is not yet included in the Top 40 index, despite being the third-biggest company on the JSE.

Investors in tracker funds are also not yet getting exposure to the diversified global miner and commodities marketing group.

Paul Smith, head of investor relations at Glencore, said local buying got off to a slow start following the listing in November last year, but it is increasing steadily by between 20 and 40 basis points a month depending on price.

"We've seen $1.8-billion of buying since January - we think that is pretty significant," he said. "The level of engagement is good, the understanding of the sector is good. We're pretty happy with it [the local listing]," Smith said.

Glencore's shares are up 19% since the start of the year, compared with BHPBilliton's 3% and 22% for Anglo American. The JSE's All Share index rose 12% over the same period.

Glencore, which has a primary listing in London and a secondary listing in Hong Kong, said in November it wanted to list on the JSE because Africa was an important and growing market for the group, and to get access to South Africa's strong institutional investor base.

The commodities trader and miner, with operations in more than 50 countries and a focus on 24 key commodities ranging from barley to zinc, is the world's biggest exporter of thermal coal and the biggest supplier to Eskom.

It makes most of its money from coal and copper. In South Africa, it also has ferrochrome and platinum operations.

CEO Ivan Glasenberg said Glencore still wanted to exit its nearly 25% shareholding in Lonmin, which it inherited when it took over Xstrata last year.

"First we need to see that the company gets into good shape on the management side, which they're doing," he said.

"Then we'll be monitoring the platinum price, and at the right time or whether there is a buyer and we think the price is good, we will exit. We're in no rush, we are taking our time."

At least three senior Lonmin executives have resigned in recent months, including operations chief Mark Munroe. The platinum miner, whose operations have been disrupted by labour unrest for the past two years, has had two rights issues in the past five years to recapitalise its balance sheet and has barely paid dividends for the past five years.

Glasenberg played down speculation that Glencore may be interested in acquiring Anglo American, saying the group was not interested in acquiring commodities it did not trade, such as platinum and diamonds, which Anglo owns.

Glencore performed better than expected in the six months to end June, increasing earnings per share by 7% and its interim dividend by 11%. It also announced a $1-billion share buyback programme, which was widely welcomed by investors, returning some of the proceeds from the $7-billion sale of its Las Bambas copper mine, a prerequisite from the Chinese authorities to get permission to take over Xstrata.

Glasenberg said the commodities super-cycle continues and that demand remains strong.

"Demand is better than it's ever been. The problem we've got to look at is supply. If we overproduce, then we've got a problem," he said.

Iron ore prices have been subdued as all the major miners - BHPBilliton, Vale, Rio Tinto and Fortescue Metals Group - have been adding tons and announcing expansion plans.

"It's not that the super-cycle isn't there. You're just killing the super cycle with oversupply," Glasenberg said.

Glencore is the only diversified miner on the JSE with very limited iron ore exposure.

The company would continue its policy to return excess cash to shareholders if it cannot find attractive assets to buy, and will continue to avoid major greenfields projects.

"We don't like greenfields. It's been very tough for most of the major companies with cost overruns and delays. Over the last 10 to 15 years most greenfields expansions have been disastrous, so we will avoid it as long as possible. We won't grow for the sake of growing and we won't leave cash in the company," said Glasenberg, who owns about 8% of the group.

Major cost overruns and delays at Anglo American's Minas Rio project in Brazil cost former CEO Cynthia Carroll her job in 2012, and Rio Tinto's Tom Albanese resigned last year after a $3-billion write-down of coal deposits it bought in Mozambique in 2011.

Of the 29 analysts who cover Glencore, 13 have a buy recommendation on the stock, 13 a hold and three a sell, according to Bloomberg data.