Shares of Glencore, the giant Swiss-based mining and trading company, may have recovered from a panic sell-off this week, but few analysts consider the company out of danger.
Glencore still has a heavy debt load, and investors remained worried about global economic trends and some management missteps. And the slowing Chinese economy is hurting demand for many of the commodities, like copper, that the company not only mines but also heavily trades.
Those factors have sent the stock reeling in trading in London this summer, from 289 pence in early June to a 52-week low of 68.52 pence on Monday.
"There is clearly a very strong degree of fear in the market more broadly associated with China," said Paul Gait, a mining analyst at Bernstein Research in London.
Until recently, though, the company's management, led by Ivan Glasenberg, seemed reluctant to acknowledge the severity of the situation.
The company announced on August 19 that it had lost $676 million for the first half of the year, compared with a profit of $1.7 billion for the period a year earlier. But Glasenberg tried to soothe concerns, writing in a letter to shareholders that commodity prices "appear driven increasingly by perceptions and technical factors rather than reality or fundamentals."
In response, investors and analysts began asking whether the company would be able to continue servicing its heavy debt, which the company said was $30 billion at the end of the first half of 2015. The company does not include $17 billion in trading inventories in that figure, an omission that may be further spooking investors.
Fears that Glencore cannot meet its debt obligations evidently helped lead to the steep drop on Monday, when the shares fell 29 per cent in a single trading day. The company reacted on Tuesday with a statement saying that its business was "operationally and financially robust" and had "absolutely no solvency issues."
By Thursday, after first being sharply higher, shares closed down 0.58 per cent for the day. That left them down about 6.2 per cent for the week.
While Gait and some other analysts doubt that Glencore is on the verge of being unable to pay its debt, analysts say the company will probably be under pressure until it convinces investors that it has taken steps to address their concerns.
"Downside risk will likely continue to dominate" the company's shares "until it can reinforce its capital base," wrote Dominic O'Kane, an analyst at JP Morgan Cazenove in London.
Glencore's origins are the trading operations of Marc Rich, the trader who fled to Switzerland to avoid tax evasion charges in the United States. He was later pardoned by President Bill Clinton. Glasenberg and a group of associates bought out the business in the early 1990s and took it public in 2011.
Glasenberg, who owns more than 8 per cent of the stock, has built the company into a global behemoth with 181,000 employees and contractors.
Based in Baar, Switzerland, Glencore has an unusual combination of businesses. The company is a major metal producer with mines in Zambia, Australia, Chile and elsewhere, and oil production in Equatorial Guinea and Chad. It is also a leading trading firm, moving oil and other commodities around the world and parking them in a vast network of storage tanks and warehouses.
Glencore argues that this combination of businesses gives it a unique insight into markets. While the company appears to have been caught off guard by this year's drop in commodity prices, the trading arm, in theory, should be a more stable business during that downturn by being able to hedge against price fluctuations.
"The absolute price level is not that relevant for a trading business," said Roland Rechtsteiner, a Zurich-based partner at the consulting firm Oliver Wyman. Mr. Rechtsteiner said the volatility of prices and the ability to arbitrage between different geographic areas were more important for trading profits.
That held true in the year's first half, when Glencore's overall earnings before interest, taxes and depreciation from trading fell by about 27 percent, to $1.2 billion. But the company's energy trading profits more than doubled to $479 million, as Glencore was able to navigate the turbulent oil market.
A key building block for Glencore was the $30 billion takeover of the miner Xstrata in 2013, which was one of the world's biggest coal extractors and exporters, but also big in copper and other metals.
That deal so far has looked poorly timed. Mr. Glasenberg paid in shares, but Xstrata brought a pile of debt along with its mines. And since then coal prices have declined, not only because of the general commodities downdraft but because coal, the most polluting of fossil fuels, is falling from favor.
And the price of copper, which is the biggest contributor to Glencore's operating income, at about 30 percent, has also been falling, down about 18 percent this year.
Analysts at Goldman Sachs have forecast that copper, now about $5,000 per metric ton, might fall to $4,500 by the end of next year.
That is one reason Glencore has at least temporarily closed some of its copper mines in Africa, shutting down the Katanga mine in the Democratic Republic of Congo and the Mopani mine in Zambia.
The company is now moving fast to cut its debt load. In September, it placed $2.5 billion in shares; Mr. Glasenberg and other employees took 22 percent of the offer. The company has also suspended its dividend, saying it plans to sell $2 billion in assets.
Some analysts say that those moves, though not small, are not enough. As a miner and trader of commodities whose prices still may not have found their bottom, Glencore is too dependent on forces not completely in its control.
How Glencore fares, Mr. O'Kane of J.P. Morgan wrote, may "hinge on small changes in commodity prices."
©2015 The New York Times News Service
