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Glencore's biggest foe is its swashbuckling self
February 23, 2017 / 12:37 PM / 9 months ago

Glencore's biggest foe is its swashbuckling self

LONDON (Reuters Breakingviews) - Glencore Chief Executive Ivan Glasenberg’s next challenge will be keeping his acquisitive instincts under control. The mining and commodities giant has recovered from its near-death experience a year and half ago. Net debt has halved to $15.5 billion and buoyant prices mean the group is once again generating mountains of cash. Resisting the urge to spend it on buying more assets is the serial dealmaker’s biggest task.

Russian President Vladimir Putin greets Sheikh Abdulla bin Mohammed bin Saud Al-Thani, chief executive of the Qatar Investment Authority (QIA), Glencore CEO Ivan Glasenberg and Bank Intesa CEO Carlo Messina during a meeting with participants of Rosneft privatisation deal at the Kremlin in Moscow, Russia January 25, 2017. REUTERS/Alexander Nemenov/Pool - RTSXBFR

Glencore’s rehabilitation has been impressive since it was forced to repair its balance sheet by launching a rights issue and suspending its dividend. Excluding one-off items, net income for 2016 jumped 48 percent to $2 billion. Cost-cutting and asset sales helped to cut net debt to 1.5 times adjusted EBITDA, down from three times at the end of 2015.

Higher commodity prices alone do not justify reversing Glencore’s new-found strategy of financial restraint. The price of copper, zinc and coal, which together account for more than half of the $58 billion group’s earnings have benefited from unexpectedly strong demand in China and capacity constraints across the entire industry.

Yet the urge to buy assets and reopen shuttered mines could be too compelling for Glasenberg to resist. Glencore now expects to generate $7 billion of free cashflow this year, and has already begun to spread some of its wealth. Earlier this month the company announced a near-$1 billion deal to buy out its partner in two mining operations in the Democratic Republic of Congo. Late last year it joined forces with Qatar’s sovereign wealth fund to jointly buy a 19.5 percent stake in Russian oil giant Rosneft.

Investors will allow Glencore some scope to make fresh investments. But resisting the urge to spend would give it more scope to distribute cash to shareholders who supported the group when it was in trouble. As the company’s largest individual shareholder, Glasenberg himself will understand the benefits of restraint.

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