Financial Times reported that the financial position of Glencore continued to improve in the Q3 giving it more firepower to repurchase prized coal assets from Xstrata an affiliated mining company without threatening its credit rating.
According to credit analysts who saw quarterly financial data Glencore disclosed to its bond holders, Glencore’s balance of cash and undrawn credit rose to USD 4 billion by the end of September as net profits also rose and net debt fell.
Glencore was forced to sell its Prodeco coal operations in Colombia to Xstrata in January, when the commodities bust squeezed both companies. Selling Prodeco for USD 2 billion allowed Glencore to subscribe to the rights issue of Xstrata, the London listed global miner in which Glencore owns 34% stake. Since then, Prodeco has been crucial to Xstrata financial recovery. The assets single handedly lifted Xstrata production of coal, its most profitable commodity in the company’s H1 and Q3.
Glencore can exercise a call option to buy back Prodeco for USD 2.25 billion before March 4. But before its Q3 earnings report concerns lingered that a buyback, even if affordable was not in the interest of improving Glencore’s credit rating. Its low investment grade credit rating is key to the company which is structured as a private partnership raising funds.
Ms Miriam Hehir credit analyst at RBC Capital Markets in London said that “We expect Glencore to repurchase Prodeco from Xstrata before the related option expires in early March. The minimum price tag is USD 2.25 billion but we could see it change hands again for a few hundred million above this. She said that Glencore could mitigate any related funding needed by possibly involving minority partners, or making disposals elsewhere.
Ms Hehir said that “They have hit the spot in terms of confirming that the Q1 of the 2009 was the cycle low.”
A buyback valued closer to USD 2.5 billion than USD 2.25 billion would compensate Xstrata for the higher value of coal since the sale completed.
Glencore net profits rose to USD 687 million in the Q3 from USD 677 million in the Q2 and USD 444 million in the Q1. Earnings before interest, tax, depreciation and amortization rose 30% from the Q2 to USD 1.1 billion. Net debt fell to USD 9.3 billion from USD 10.4 billion. The gearing level of 35.2% remained high, but was an improvement on 38.5% in the Q2.
(Sourced from Financial Times)
