By Olivia Kumwenda-Mtambo
JOHANNESBURG (Reuters) – Mining and commodities trading firm Glencore (GLEN.L) announced on Monday it will suspend dividends, sell assets and raise $ 2.5 billion in a new share issue as it aims to cut its debt by a third to $ 20 billion by the end of next year.
Formerly just a commodities trader, Glencore merged with mining company Xstrata in 2013. The trading business was seen as cushioning the combined company against swings in commodity prices but last month the company reported first half earnings had slumped 29 percent.
Shares in the company were up 8 percent at 133 pence by 0740 GMT, having fallen by nearly 60 percent this year to record lows, a much worse performance than that of rival miners like BHP Billiton (BHP.AX) (BLT.L) and Rio Tinto (RIO.AX) (RIO.L).
The company has been under pressure to cut debt — which stood at $ 29.6 billion net at the end of June, as prices for its key products, copper and coal, sunk to more than six-year lows
Glencore said on Monday 78 percent of the proposed share issue was underwritten by Citi and Morgan Stanley while its senior management have committed to take up the remaining 22 percent.
It said it would not be paying a final dividend for 2015, which would save about $ 1.6 billion, while around $ 800 million would be saved from the suspension of the 2016 interim dividend.
The company expects to raise about $ 2 billion from the sale of assets and $ 500 million to $ 1 billion will be saved from further cuts in capital spending to the end of 2016. It also expects to reduce working capital by an additional $ 1.5 billion by the end of next June.
It is suspending some African copper production operations at its Katanga Mining (KAT.TO) unit in Democratic Republic of Congo and Mopani Copper Mines in Zambia for 18 months, removing 400,000 tonnes of cathode product from the market.
CREDIT WARNING
Ratings agency Standard & Poor’s had warned last week it may lower Glencore’s ‘BBB/A-2’ credit ratings, if the company’s operational funding to debt ratio failed to recover to more than 23 percent from 20 percent in the year to June 2015.
Moody’s had reaffirmed its Baa2 ratings on Glencore with a stable outlook but said the company needed to cut its gross debt further to support the rating.
“…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,” Chief Executive Ivan Glasenberg said in a statement.
Last month Glencore reported a slump in first-half earnings and said tough market conditions were hurting the business even though it had previously said the trading division would meet earnings targets whatever happened to commodity prices.
The company said on Monday it was sticking to its forecast for the trading division to make an operating profit (EBIT) this year of $ 2.5 billion to $ 2.6 billion “and remain confident of our long-term guidance range of $ 2.7 billion to $ 3.7 billion.”
“Unlike other management teams in the sector, Glen’s has acknowledged its debt problem and is taking steps to address it,” said Bank of America-Merrill Lynch analysts in a note to clients.
(Editing by Greg Mahlich and Keith Weir)
