Glencore shines a sliver of light on its financials

One of the more unexpected consequences of the upheaval caused by last year’s near financial meltdown is the increased transparency it instilled in the notoriously secretive Glencore International – the world’s largest metals trader.

In keeping with its newly found propensity to disclose financial information the company announce first half results on Aug. 26.

And while the single page posted on its website would not meet the disclosure standards for a publicly traded company, it’s more information than the company had ever posted prior to this year.

Entirely owned by management and employees, the Baar, Switzerland-based company announced net income of US$1.12 billion for the first six months of the year. That number is down from the previous year’s first half total of US$2.63 billion

But the good news is that second quarter net income was up 53% from first quarter and the company says it expects that positive trend to continue.

Glencore’s role as a trader means that it is able to respond more rapidly to changes in commodity prices than pure-play producers, making its financial results a more accurate representation of the state of the metals market.

The company is said to generate 70% of its gross profits from its marketing activities.

And the results showed Glencore to be getting on top of its debt as well. Net debt, taking into account readily marketable inventories, fell to US$10.4 billion from US$11.5 billion.

The company is also taking liquidity seriously. In May of this year it replaced its US$925 million revolving credit with a new US$815 million facility and it extended US$6.7 billion medium term revolving credit facility by one year to 2012.

Glencore’s moves on liquidity and debt are connected to its turn to more public disclosure.

The company first opened its books to bondholders in March of this year, amidst concerns over the company’s financial health given the downturn in metal prices.

Lower prices, combined with a lack of financial disclosure were taking a toll on the company’s bonds and derivatives associated with them.

The cost of insuring against Glencore defaulting on its bonds skyrocketed earlier this year and a severe drop in its bonds’ prices increased the yields on the US$966 million due in 2015 to a staggering 21%.

Chief Executive Officer Ivan Glasenberg and Chief Financial Officer Steven Kalmin of Glencore even went to the unusual extent of fielding questions during a two hour conference call at the time.

Still, its efforts on better disclosure didn’t spare it completely from harm as its bonds were downgraded to a negative Baa2 rating by Moody’s from a stable rating. Standard & Poor’s rates the bond as a stable BBB.

Moody’s cited “heightened uncertainty” about profitability and cash flow for the downgrade.

But as the second quarter results show, things have begun to improve. The results come at a time when the yield spread between Glencore bonds and government issued bonds has begun to shrink.

But better disclosure wasn’t the only tool used by the company to improve its financial standing. As metal prices plummeted it closed unprofitable mines and sold coal assets to Xstrata for $2 billion. That allowed it to participate in Xstrata’s US$5.6 billion rights offer.

The situation had some speculating that Glencore may seek a public listing in the future, while others opined that the company would simply continue to scale back on its mining operations and focus solely on trading.

Glencore was founded by the infamous Marc Rich back in 1974 and began operations with a focus on trading metals, minerals and crude oil. It later branched out in to trading agricultural products and coal before acquiring mining, smelting, refining and processing assets — taking it from a pure physical commodity marketing company into a diversified natural resources group.

Rich was convicted in the U.S. in the early 1980s for illegally trading with Iran and tax evasion, but held out in Switzerland to avoid punishment. He was pardoned by outgoing president Bill Clinton in 2001.

Rich sold out his interest in the company – which was then known as Marc Rich & Co. – in 1993 and the company was renamed Glencore.

The company currently owns 16 production assets across a range of commodities and has operations spread over six continents making it a rival to such big name metal players as BHP Billiton (BHP-N, BLT-L), Rio Tinto (RTP-N, RIO-L) and Vale (RIO-N).
Unlike those firms, however, the company has traders based in its offices in Switzerland, London and Singapore.

Glencore also has significant stakes in publicly listed companies with a 35% stake in Xstrata (XSRAF-O, XTAT-L), a 38% stake in Century Aluminum (CENX-Q), a 71% stake in Minera Resources (MRE-A), a 32% stake in French recycler Reclyex and a 78% stake in Katanga Mining (KAT-T).

It also holds a 12% stake in Moscow-based aluminum producer United Co. Rusal.