Shares in Glencore slumped almost 30% to close at a record low, following a note by analysts at Investec, which raised doubts about the Swiss company’s valuation should commodities prices not improve.
“If major commodity prices remain at current levels, out analysis implies that, in the absence of substantial restructuring, nearly all the equity value of […] Glencore […] could evaporate,” the investment bank said.
Glencore recently announced a plan to cut its huge debt pile through a £2.5 billion (US$3.8 billion) share placement, the suspension of its dividend and asset sales. The company is currently weighed down by over US$30 billion of net debt (total debt less cash and the value of the commodities it holds for trading purposes) following is purchase of Xstrata in 2012, while its market capitalisation has fallen to about US$15 billion.
In response to the fall in share price, the company said in a statement that it had "taken proactive steps to position our company to withstand current commodity market conditions. Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues."
"Mining companies gorged themselves on cheap debt in a race to grow production following the Chinese stimulus that occurred in the wake of the great financial crisis,” Hunter Hillcoat, an analyst at Investec, told the BBC. "The consequences are only now coming home to roost, as mines take a long time to build."
And more pain may be in store with traders warning Reuters that Glencore’s share price might fall further as more assets were put up for sale: “The market is concerned that there is going to be a fire-sale going on at Glencore, Basil Petrides of Beaufort Securities told the new agency. “I don’t think anyone knows where the floor is on the stock at the moment.”
Meanwhile, Anglo American, which was also mentioned in Investec’s note, saw its shares close 10%. The FTSE 350 mining index sank to its lowest level since December 2008.
Edited from various sources by Jonathan Rowland.
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