NEWS ANALYSIS

Glencore's true value has analysts guessing

Employees monitoring share prices at the Jakarta Stock Exchange in Indonesia. Resources firms led by mining giant Glencore headed a deep sell-off in Asian markets yesterday, following painful losses across Europe and New York as fears about China's s
Employees monitoring share prices at the Jakarta Stock Exchange in Indonesia. Resources firms led by mining giant Glencore headed a deep sell-off in Asian markets yesterday, following painful losses across Europe and New York as fears about China's slowing growth resurfaced.PHOTO: AGENCE FRANCE-PRESSE

LONDON • Glencore, the commodity trader that lost about a third of its value, is worth either US$98 billion (S$139 billion) or US$26 billion, depending on which analyst you ask.

At Sanford C. Bernstein, price targets published by analyst Paul Gait suggest the company can rally sevenfold to 450 pence, the top end of predictions tracked by Bloomberg.

At the bottom, Nomura Holdings' 120 pence forecast implies a market value that is US$72 billion lower.

The dispersion shows the difficulty in valuing a company caught between China's slowing economy and mounting concerns about its debt load.

In addition to diverging views on copper prices, questions about how to evaluate Glencore's trading business, unique among big mining companies, are muddling the equation, according to Clarksons Platou Securities' Jeremy Sussman.

"Glencore does have a unique trading business that is different from their competitors, and it's a much more difficult business to model than a straight 'you mine it, you sell it, and take whatever margin' one," said Mr Sussman.

He recommends holding the stock, which he estimates will rise to 190 pence.

Analysts "with targets in the higher end are probably in the camp that think trading will return to levels where it had been in the past couple of years."

Glencore tumbled 29 per cent on Monday, the biggest slide since its US$10 billion initial public offering in 2011, after Investec warned there would be little value for shareholders if low raw-material prices persist.

With a closing stock price of 68.6 pence, below the most bearish estimate, at least two of the three analysts with a sell rating have a forecast that implies a rally.

Of the remaining, 17 have a buy rating or similar, and 12 recommend holding the shares.

Bernstein's Mr Gait, who has the most bullish stock price projection of the analysts tracked by Bloomberg, says that while the trading division remains "somewhat of a 'black box'", it still generates earnings, he wrote in a note last week.

The stock has fallen so much that it now reflects the risk of bankruptcy, according to Mr Gait.

He says the slump is overdone and recommends buying the shares.

The stock advanced 6.4 per cent at 8.10am in London.

Glencore shares trade at a valuation that is about a third that of miners in the Stoxx Europe 600 Index.

In the three years before 2015, its price relative to earnings before interest, taxes, depreciation and amortization was more than 55 per cent higher.

At 330 pence, the difference between the highest and lowest analyst estimate is almost five times Glencore's share price.

That compares with an average of 52 per cent for other members of the Stoxx 600. Tullow Oil, Seadrill and miner Anglo American have the next widest spreads in price targets.

A Glencore spokesman declined to comment for this report.

Mr Patrick Jones, an analyst at Nomura in London, ventured: "What should we be paying for that trading business?

"That's the big question. I don't think we should be paying any more than what its parts are. It should be a discount because there's very little synergy between" the trading and mining businesses, he said.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on September 30, 2015, with the headline 'News analysis Glencore's true value has analysts guessing'. Print Edition | Subscribe