Glencore’s share price has revived slightly after a massive drop yesterday.
The miner’s stock fell by close a third yesterday on the back of negative investor notes questioning the value of the company.
Investec analysts Hunter Hillcoat and Marc Elliot released notes stating Glencore would offer marginal value to shareholders, if the ongoing low commodities prices continue.
The two said that without major restructuring most of Glencore’s equity value would evaporate.
“The challenging environment for mining companies leads us to the question of how much value will be left for equity holders if commodity prices do not improve,” Investec said in a note to investors yesterday.
“Despite the drastic action that management has announced recently (even assuming all of the measures are successfully implemented), a spot price scenario results in an almost complete collapse in forward earnings such that no meaningful estimate of shareholder value can be derived under our price-to-earnings methodology,” Investec said.
The sharp decline took Glencore and the analysts themselves by surprise.
“We were surprised by the reaction. It was well beyond what we had expected in that it was just a scenario but clearly it hit a nerve in the market," Hillcoat told Farifax.
The market quickly turned on Glencore, painting it as the Lehman Brothers of mining.
However sources within Glencore were quick to reject this, adding that many of the financial assumptions made by Investec were inaccurate.
“We don’t rate the assumptions in the Investec notes,” the source told Australian Mining.
“The figures were off in terms of EBITDA and free cash, and unlike Lehmans we have a lot of liquidity, no covenants, and ample lines of funding with banks.”
An official Glencore company statement added; “Our business remains operationally and financially robust – we have positive cash flow, good liquidity, and absolutely no solvency issues.”
Citigroup have backed Glencore following the market slaughter, stating that the company doesn’t have a stressed balance sheet, has the ability to sell assets – and is in the process with its agricultural stakes – and rated the business as a buy, according to Bloomberg.
The markets response is overdone,” Citigroup said in a report.
“In the event the equity market continues to express its unwillingness to value the business fairly, the company management should take the company private, whereby restructuring measures can be taken easily and quickly.”
This position was supported by Jefferies Group LLC, which gave Glencore a hold rating, stating “there is value in Glencore shares if the company can pull the appropriate levers now, but risks are clearly very high”.
A resources analyst at Old Mutual Investment Group added: “I think what we’ve seen is an over-reaction.”
Glencore shares were trading up 17 per cent from yesterday’s low .
However it has not made moves to return to the pre-slump levels.