Glencore looks to take a big step in turnaround

The reputation of Glencore’s management could be restored if the metals and mining giant can show it’s on its way to meeting its aggressive debt-reduction target when it reports first-half earnings. 

Last September, Glencore’s management were left chastened. Having claimed in August the company would fly through one of the worst slumps in commodities prices for decades, just a month later Chief Executive Ivan Glasenberg and his team unveiled a plan to sell-off assets, raise fresh cash from shareholders and slash the dividend. It was forced to act after its shares plunged amid concerns over a huge debt pile built up during an acquisition spree.

It was no different to its peers across the sector. The likes of BHP Billiton, Rio Tinto and Anglo American have all had to follow the same course of action. The difference for Glencore was management’s over-confidence last August when they unveiled first-half results, and the larger size of the debt pile it had to address.

A year on, and management’s reputation could be restored when it presents this year’s first-half results. Revenue and profit are expected to fall sharply, but the company is expected to show that it’s well on its way to meeting its debt reduction target, and that’s the main focus for investors.

Glencore’s target is to hit a net debt target of $17 billion to $18 billion by the end of 2016, down from close to $30 billion in the middle of last year. As well cutting $2.4 billion of dividend payments and raising $2.5 billion in its stock offering, the company has sold assets worth $3.2 billion from its $4 billion to $5 billion disposal target programme for 2016.

Further evidence that debt is plunging as planned – Glencore is moving faster to cut debt than any of its peers in the metals and mining sector – will be welcomed by investors, and will overshadow an expected drop in revenue and profits. According to reports in Australia, the metals and mining giant is closing in on selling the $400 million Cobar copper mine in New South Wales, a deal which if completed could move it beyond its debt reduction target.

Analysts expect first-half revenue to drop to $75.89 billion, from $85.71 billion a year earlier, while adjusted earnings before interest, tax, depreciation and amortisation is expected to drop to $3.84 billion, from $4.61 billion. Adjusted net income is expected to fall to $245.0 million, from $882.0 million, although it could swing back to a profit in terms of unadjusted net profit compared with last year’s loss.

These results could mark a nadir. Whilst commodities prices remain well down on where they were a year ago, they have stabilised and many have risen over the past month, particularly zinc. In fact Glencore, the world’s biggest zinc miner, may be tempted to re-start some of its shuttered production given the rally in the price this year, although it will want to be sure that any extra supply is met with demand from China’s steel industry. Glencore’s management have learnt a lesson and are understandably more cautious that they previously appeared.

At the same time, the outlook for Glencore’s trading division, which moves all those commodities around the world, will also be in focus amid fears that unit has had a weak start to 2016.

Glencore’s investors have had a better time of it so far in 2016 in terms of share price. The stock listed at 530 pence a share in May 2011 and then fell for the four and a half years, reaching a low of 66.67 pence. However, the shares have doubled in price so far this year, and are currently trading at 181.49 pence.

While a continued recovery in commodity prices is likely to be slow over the next year or so, the outlook for Glencore’s share price is improved and management has a chance this week to prove that the turnaround is on track. The question then will be whether ratings agencies deem the turnaround to be working. The S&P 500 cut the company’s debt to just one notch above junk in February of this year.

From a technical perspective, the recovery in Glencore’s shares has been remarkable, rising 171% in around 11 months. Price is trading within a rising wedge pattern, which typically calls for a bearish downside breakout. We have seen the stock follow crude prices lower over the last week and this is carrying on into today.

Meanwhile, there is a clear overbought stochastic and a bearish divergence in the MACD histogram, and the share price looks seemingly set for a more bearish period. The crucial question is whether this is the beginning of something long-term or simply a short-term pullback. We have not seen anything yet to say that this is the beginning of a wider sell-off, with the pattern still in play.

On the daily chart, it is evident that price has also broken lower from a shorter term rising wedge pattern, with price now breaking below the first swing low of £1.82. The key support levels to look out for are £1.76 (April high) alongside the all-important £1.67. The £1.67 mark is the critical one, as a break and close below that level would necessitate a breakout from the wedge, alongside a clear transition out of the uptrend.

As such, while there is a bearish outlook for now, it is likely that buyers will come back in around the £1.76 area. Should we see price break and close below £1.67, then this would point towards a longer lasting and deeper pullback for the stock.

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