Glencore: Call it “G”. This is what investors need to quantify before they sign off orders for Glencore’s record-breaking flotation in London and Hong Kong to be priced this week. It represents the premium or discount that the commodity trader-cum-miner should command owing to its unusual business model and previously unknown management team. For now, it should be a negative number.
Valuing Glencore starts with a sum of its parts. First, there’s the commodity trading unit that looks like a mature version of Noble Group, the Singapore-listed agricultural and energy trader. Given Glencore’s lower growth potential, a 15 per cent discount to Noble’s price earnings multiple might be appropriate. On that basis, it would be worth $27 billion. Glencore also has listed stakes in natural resources companies, worth about $29 billion at current values. Finally, it has unlisted mining assets. If these are valued at a slight discount to the mining sector, reflecting Glencore’s appetite for digging in areas that present greater than average geopolitical risk, they have an enterprise value of perhaps $16 billion.
Tot all that up and subtract net debt against the mining assets of $16 billion, and the sum of the parts comes to $56 bln, or $64 billion with new money — near the top of the price range. In theory, Glencore could be worth more than the sum of its parts. Intelligence from the trading business means Glencore knows when it should be upping or cutting production at its mines, and gives the group access to M&A opportunities. The trading operations also benefit from having secure supplies from the mines. This all suggests “G” could be positive.
But it would be surprising if the market was willing to give the business a conglomerate premium on day one. What’s more, the board is untested as a collective; and the debacle over the chairman’s appointment cannot be ignored. With $10 billion in the company, chief executive Ivan Glasenberg has an interest in protecting his wealth. But the negative components within the G factor will be strong in the short term. A 10 per cent discount leaving the stock below the middle of the range looks about right.