Glencore has moved to strengthen its balance sheet by announcing it will cut dividends, suspend operations at several mines, and undertake $US2.5 billion in capital raising.
Glencore’s CEO, Ivan Glasenberg, said the move comes in response to “market speculation around the sustainability of our leverage” amid the current market uncertainty.
The mining and trading house has lost 66 per cent of it share value in the last year, and carries a debt load of $US30 billion.
In total, the measures set to be taken by Glencore are expected to have an aggregate value of up to $US10.2bn. The company said the objective was to reduce net debt to the low $US20s billion by the end of 2016.
Included in the measures is the suspension of the 2015 final dividend and the suspension of the 2016 interim dividend, expected to save $US1.6 billion, and $US800 million respectively.
A further $US2 billion will be raised from the sale of assets, including but not limited to, proposed precious metals streaming transactions and the minority participation of 3rd party strategic investors in certain of Glencore’s agriculture assets, including infrastructure.
Meanwhile, Glencore is planning to pull 400,000 tonnes of copper cathode from the market over the next 18 months by closing two of its African mines.
Analysts have been supportive of Glencore’s announcement.
“Unlike other management teams in the sector, Glencore has acknowledged its debt problem and is taking steps to address it," Bank of America Merrill Lynch said.
“We think the plan goes some way to addressing some of our concerns on Glencore's financing [but] we do still have a question mark on Chinese demand … Even after the reductions, the company will still be quite highly geared."
While Bernstein praised the company for showing “proactive capital discipline”.
"Firstly, it removes a certain degree of uncertainty as bankruptcy risks had clearly become a serious concern for investors. Secondly, the proactive management of copper should not only reduce operating costs but also support the copper price.”
Glasenberg said he remains very positive on the long-term outlook for the business, reinforced by the fact that senior management have agreed to take up 22 per cent of the proposed equity raising, or about $US550 million.
“The measures we have announced today do not affect our core business activities and overall franchise value and have been designed to sensibly accelerate the deleveraging of our balance sheet, maximise future cash flow generation in the current weak commodity price environment and substantially improve our financial and credit metrics, stability and strength, in the event of a prolonged weaker pricing environment,” he said.