How often do you hear of a blue-chip share price rising by 100% within the space of seven trading sessions? I’m pretty sure you can’t think of many examples...if any. And if it does happen, it’s likely only down to the company being subject to a takeover offer and a handsome premium being offered for the equity paper. Or, as in the case of diverse mining giant and commodity trader Glencore ($GLEN), because the company has lost so much of its value over such a short space of time (-79% from 2015 high in May; -50% within seven recent sessions) and any hint of a bounce fuels a combination of bargain-hunting interest and short-covering panic, which drives the price higher, quickly. Very quickly.
The Glencore story has generated huge interest on account of the share price volatility seen, having dragged down both the sector on heightened contagion fears from exposure to commodities in the face of slowing economic growth (read China), and then back up again on the perception of the sector being mis-priced, and thus oversold. Ever since GLEN had its $60bn IPO in May 2011, selling us the idea that its famous and highly profitable trading unit would help it ride out any storm on the commodity production side, the chips have been stacked against it with commodities prices grinding to multi-year lows, and the trading unit unable to offset lower production revenues. By January of this year, GLEN shares, which debuted at 530p, were showing a 50% loss. A late September plunge resulted in a brief stint as a penny stock (67p!). Less than 4.5 years, and 90% evaporated. Impressive...kind of.
Glencore is Too Exposed in an Uncertain Global Market
Why the demise? Quite simply, it’s too exposed to uncertainty over global growth and thus demand for raw materials. If China doesn’t need to make stuff either for itself or the rest of the world, then it’s not going to need raw materials to do so. This will not help anyone who’s business is iron ore, copper, coal etc. Things are made even worse by years of mining sector investment and expansion of production leading to a supply glut in most commodities. GLEN’s $30bn acquisition of copper giant Xstrata in 2012/13 didn’t help, adding more copper eggs to its production basket. You won’t be surprised that an overlay of the GLEN share price on that of Copper shows them sharing pretty much the same southerly course since the company’s first day as a listed company.
However, now the market view is that while the company has already begun to reduce its $30bn net debt position (share placement complete, but much work still to do), the recent sell-off to pennies (brokers questioned the equity value if commodities fell further, and whether it could retain access to financing) is that things have gone too far, helping the shares rebound. Well...in part. Some of it was questionable media suggestion that the company was open to takeover offers (show me a company that isn’t!). Some was related to asset sale speculation. A big part will have been a reversing of hitherto profitable short bets on both GLEN and the copper price (using GLEN as a proxy). A USD off its highs on the prospect of a delayed rate hike is also helping dollar-denominated commodities off their lows, an additional and welcome boost. The question on everybody’s lips is how much further the bounce can go. More to come, or almost done?
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