The ongoing slowdown in the Chinese economy is sending ripples across the global economy. Shares of mining titan Glencore PLC hit a new all-time low in European trading Monday given worries that persistently low commodity prices will eventually swamp its debt-heavy balance sheet.
Glencore’s stock has dropped dramatically this year, despite several moves by the firm to get a grip on its debt burden. In one major step designed to reassure investors, the Swiss firm raised $2.5 billion a few weeks ago to sell new equity to pare down the debt load.
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On Monday, Glencore shares were off by 25% at one point, sinking to a record low of 71 pence. That put its stock price over 40% below the price investors paid for shares less than a month ago in the stock offering.
Industry analyst Investec says Glencore on the ropes unless commodity prices bounce
Analysts and shorts are beginning to circle like sharks around Glencore. For example, Investec Securities published a report Monday arguing that if commodity prices don’t bounce soon, Glencore’s stock value is “virtually eliminated.” The $30 billion in debt will simply swamp the reduced income from its mines worldwide.
If prices don’t recover, “Glencore may have to undertake further restructuring beyond the dividend suspension, capital raising and asset sales programs it has already announced,” Investec said.
Apparently Goldman Sachs Group Inc. has related worries, as they note that investors aren’t “convinced that Glencore has gone far enough to totally allay fears that the industrial assets can service the new lower debt level,” in a research note published last week.
Glencore expects earnings before interest, taxes, depreciation and amortization this year in the high single digits, according to a knowledgeable source at Glencore that wishes to remain anonymous.
Sanford C. Bernstein analyst Paul Gait does not agree with Investec and Goldman Sachs, as he argues in a September 23rd report that the sell-off in Glencore’s shares is overblown.
“For there to be no equity value left in the business at all, there would need to be a significant further fall in the commodity price deck,” Gait noted.
Several analysts have noted that Glencore is also seeking to raise an additional $2 billion from asset sales which is likely to be difficult in the current environment.