Glencore’s Q1 feeds the bears

June 14, 2011

By Chris Hughes
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — It’s back to the classroom for Glencore investors. Just when they were getting their head around its moving parts, the commodity trader has shown it can be unpredictable.

First-quarter earnings were flat versus the last three months of 2010. Momentum stalled due to the disruption surrounding the Japanese earthquake, and Glencore says it had fewer opportunities to arbitrage commodity prices around the world. The effect was acutely visible in the year-on-year quarterly comparison, with operating profit from trading metals and minerals down 21 percent.

Investors who bought into Glencore’s float in May on the basis that its commodity trading arm would thrive in all market conditions weren’t totally misguided — helped by energy, the overall trading business was still up year-on-year. And when Japan starts buying commodities again, that should show up in Glencore’s numbers.

Earnings in the last two quarters have been running at their average for 2007, when Glencore made a record $5.2 billion over the year (including a sizeable contribution from its 34 percent stake in mining group Xstrata). Prior to the float, even the most bearish analysts thought Glencore could achieve the same result this year. Indeed, Glencore highlighted its peak-level earnings run-rate in its last numbers before going public.

Even after the 3 percent drop in Glencore’s shares on June 14, investors still seem to think that’s achievable. Annualised, the trading division’s first-quarter earnings, assuming a 10 percent tax rate, stand at $2.4 billion. On a 12 times multiple a reasonable discount to its main listed counterpart — that implies a $29 billion valuation. Annualised EBITDA, excluding the Xstrata contribution, in Glencore’s mining operations is $3.5 billion, implying a $16 billion market value on a sector multiple of 4.5. Glencore’s listed stakes are today worth $28 billion. Adjust for net debt and apply a 10 percent holding company discount and that gets to around the current $58 billion market value.

But the first-quarter figures demonstrate Glencore’s sensitivity to the macroeconomic backdrop. Recent weak U.S. economic data and evidence that China is responding to high commodity prices by running down inventories may be the next disappointments. A record year isn’t guaranteed.

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