The Long and Short
Glencore looks strong in its sector
Dan Bruzzo, CFA | February 24, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
GLENLN intermediate and long-term notes appear to offer good relative value to the broader, diversified metals and mining segment. The company boasts an improving credit profile and is coming off a record year of earnings. And its relative value is particularly striking compared to its peer, Teck Resources.
The lower-rated (Baa3/BBB-) Teck Resources bonds are trading closely in-line with similar maturity GLENLN notes (Exhibit 1). Just this week, TCKBCN announced the long-speculated break-up of the company, which will see the metallurgical coal operations spun out into a new entity, while the existing debt will remain with the considerably smaller copper and zinc operations, to be rebranded Teck Metals. Although the proposed restructuring calls for free cash flow to be streamed back to the metals operations until $7 billion has been repaid, and the rating agencies have initially committed to investment grade ratings for the legacy operations, the transaction creates material uncertainty to existing TCKBCN debt holders. Owning GLENLN credit outright looks better than TCKBCN credit given its stable outlook versus the risks inherent to the proposed restructuring.
Exhibit 1. GLENLN Bonds Outstanding versus comparables (intermediate to long-end):
The most appropriate trading comparables include the investment grade, diversified mining operators. Anglo American (AALLN: Baa2/BBB+/BBB) is more of a pure-play mining operator than GLENLN. AALLN’s bulk commodities include iron ore, manganese, metallurgical coal; base metals include copper, nickel, precious metals (platinum, diamonds). BHP Group Ltd (BHP: A2*+/A-/A) is also more of a pure-play mining operator. Focus commodities are iron ore, metallurgical coal and copper. Rio Tinto (RIOLN: A2/A/A) is a pure-play mining company, focused on aluminum, borates, copper, gold, iron ore, lead, silver, tin uranium, and zinc. Lastly, is Teck Resources (TCKBCN: Baa3/BBB-/BBB-), which is in the process of splitting its operations. TCKBCN is an integrated natural resource group, with revenue from both mining and processing. Mining includes zinc, copper, molybdenum, gold and most notably metallurgical coal. TCKBCN also produces refined metals (steel), and specialized metals.
Headquartered in Baar, Switzerland, Glencore PLC (GLENLN: Baa1/POS, BBB+/POS) is among the global leaders in mining and commodity trading. Core mining markets include copper, zinc, thermal coal, as well as ferrochrome, nickel, metallurgical coal, and cobalt. GLENLN also owns a 49% stake in Viterra giving it exposure to agricultural businesses as well. Key operations are located in Chile, Australia, Democratic Republic of Congo, South Africa, Peru, Kazakhstan and Canada. The company was largely formed through the 2013 merger of Glencore and Xstrata. GLENLN’s marketing/trading division provides diversity of earnings and a source of profitability during periods of volatile commodity prices. Metals & Mining represents about 42% of total revenue while Energy Products (coal & oil) comprise the remaining 58%, with marketing/trading activities making up about 20% of total cash flows across both platforms.
Exhibit 2. GLENLN curve versus investment grade Metals & Mining peers
Ivan Glasenberg (9%) and Qatar Holding LLC (9%) both hold significant stakes in the GLENLN. Activist Bluebell Capital Partners has been pushing GLENLN to spin off its coal assets, but management remains committed to running those assets to depletion over the long-term.
GLENLN had record earnings in FY 2022, generating over $31 billion in total EBITDA throughout the year. The company benefited from higher coal prices and commodity prices in general rallying on sentiment of China re-opening its economy. Like most metals/mining operators, GLENLN remains leveraged to the Chinese economy, as demand will have significant influence over core end-markets.
GLENLN maintains a very low debt burden. Total gross debt burden was down to $28.8 billion as of year-end 2022. That is down from a peak of as high as $55.2 billion in the year of the Xstrata merger (2013), and a consistent run-rate in the mid-to-high $30 billion range over the past several years. Gross Debt-to-EBITDA was down to 0.90x as of year-end 2022 versus 2.09x in the prior year. Net Debt-to-EBITDA is down to 0.84x as of year-end 2022 versus 1.89x in the prior year, and as high as 4.14 in 2020. With net debt at such historical low levels management has shifted focus to shareholder renumeration from debt reduction, which includes its recently announced $1.5 billion share buyback program.
GLENLN has adequate liquidity relative to upcoming public debt maturities. There is $1.9 billion in cash and equivalents on the balance sheet as of year-end 2022. The company had $6.5 billion outstanding on its credit facility due in 2023, versus the entirety of its $9.8 billion facility available through 2024. There are $3.0 billion in public debt maturities in the current year, $2.8 billion due in 2024, and $3.2 billion in 2025.
The rating agencies recently have recently acknowledged GLENLN’s improved credit profile. S&P revised the outlook on its BBB+ rating to Positive from Stable in August 2022, reflecting record low net debt outstanding and overall tight financial policy. Moody’s also revised its outlook on the Baa1 rating to Positive from Stable in October of last year, similarly reflecting the tighter financial policy and improved credit metrics. Both agencies will be considering an upgrade to A-/A3 over the next twelve months.
GLENLN had been subject to several investigations creating regulatory uncertainty in the near-term, many of which have already been settled. There were two investigations in the US – US Justice Department since 2018 and the US Commodity Futures Trading Commission (CFTC) since 2019 (BOTH SETTLED). There were also investigations by the Brazilian authorities since 2019 (SETTLED), and UK Serious Fraud Office since 2019 (SETTLED).
GLENLN has direct exposure to Russia via two minority stakes in Russian companies (EN+ and Rosneft) with combined book value of only about $1.3 billion as of last year-end. Mostly, the Russia-Ukraine conflict has resulted in volatility in energy markets, benefiting results at GLENLN’s marketing division.
GLENLN is capping production and running its assets to depletion over the next 30 years, with plans to reach net zero emissions by 2050. Recently canceled a $1.5 billion coal project in Australia and announced plans to close 12 coal mines by 2035 both in late 2022.
GLENLN’s overall ESG picture has been on an improving trajectory, although material exposure to coal places the company in a higher ESG category versus some other large-scale, higher-rated peers. The company also maintains exposure to higher-risk emerging countries, such as DRC and South America, versus some peers that are more concentrated in developed areas, although GLENLN exited the higher-risk region of Zambia in 2021. Safety remains an important consideration for the overall credit profile as fatalities at mines had been running above industry peers over the past several years. Meanwhile, governance appears to be in-line with peers.