Mining group Glencore today announced plans to reduce group net debt and adapt the business to the current commodity landscape. Management outlined plans for a fully committed proposed equity capital raising of up to US$2.5 billion alongside additional capital preservation/debt reduction measures which, taken together, have an aggregate value of up to US$10.2 billion, and certain other portfolio optimisation and cost reduction actions, with the objective of reducing net debt to the low US$20s billion by the end of 2016. The share price rose by over 8% in early UK stockmarket trading.
- A proposed equity issuance of up to US$2.5 billion to reduce indebtedness and increase financial strength.
- 78% of the proposed equity issuance underwritten by Citi and Morgan Stanley.
- Commitments from Glencore senior management (including CEO, CFO and several Board members) to take up the remaining 22% of the proposed equity issuance.
- More details of the proposed equity issuance will be provided in due course.
Additional measures with a value of up to US$7.7 billion to be implemented between now and the end of 2016, including:
- Approximately US$1.6 billion to be saved from the suspension of the 2015 final dividend, intended to do so in the current commodity environment.
- Approximately US$800 million to be saved from the suspension of the 2016 interim dividend, intended to do so in the current commodity environment.
- Approximately US$1.5 billion to be generated from further reduction in working capital.
- Approximately US$2 billion to be raised from the sale of assets.
Ongoing focus on portfolio optimisation and reduction of operating expenditures:
Operations at Katanga and Mopani are under review and in the process of suspending certain African production until the completion of the remaining cost-transforming projects which are on schedule to be completed by the first half of 2017. An 18 month suspension will remove approximately 400,000 tonnes of copper cathode from the market.
"Notwithstanding our strong liquidity, positive operational free cashflow generation, lack of debt covenants, modest near-term maturities and the recent affirmation of our credit ratings, recent stakeholder engagement in response to market speculation around the sustainability of our leverage, highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty.
The measures we have announced today do not affect our core business activities and overall franchise value and have been designed to sensibly accelerate the deleveraging of our balance sheet, maximise future cash flow generation in the current weak commodity price environment and substantially improve our financial and credit metrics, stability and strength, in the event of a prolonged weaker pricing environment.
We remain very positive on the long-term outlook for our business and this is reinforced by senior management's commitment to take up 22% of the proposed equity issuance."
Glencore debt concerns
Analyst concerns regarding the level and speed of previously announced plans to reduce group net debt and adapt the business to the current commodity landscape appeared to weigh heavily on its share price today - the share price fell fell 20% by mid-afternoon in trading on the UK stockmarket.
In the face of ongoing concerns for the Chinese economy and falling metal prices, worries that recently outlined action to reduce the company's debt, may not be enough, were expressed in a research note from Investec. The note follows in the wake of a similarly cautious note from Goldman Sachs. The debt-cutting programme announced earlier this month included selling $2.5 billion of new stock in an attempt to reduce the company's debt to $20 billion from $30 billion.
Standard & Poor's previously reduced its outlook on Glencore's BBB level to negative. Moody's Investors Service earlier this month cut its outlook to negative on Glencore and affirmed the company's Baa2 debt rating.
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