Glencore to suspend dividend, raise equity to cut debt

Chief executive Ivan Glasenberg said in an interview that he believed the company’s balance sheet is “in good shape”. The drastic move offers a grim view of commodity prices that undermines the investment case for the sector.

Mr Glasenberg indicated investors had little appetite for risk and wanted to the company’s balance sheet to be able to withstand further slumps in commodity prices.

“If this doesn’t do the trick, we’ll have a very hard environment in the world”, he said, since it would mean sharply lower commodity prices than today.

It could be a fatal blow for Glencore’s designs on rival Rio Tinto, which it wanted to take out through an all-scrip “merger of equals”.

At the same time, the announcement of a upcoming stoppage at Glencore’ Mopani operation in Zambia and the Katanga facility in the DRC had an immediate effect on copper prices, with the red metal climbing more than 1% to $5,192 a tonne on the London Metal Exchange.

However among the doubters questioning the company’s previous strategy of weathering the storm in commodities without taking the knife to dividends, or turning to the market for additional cash, were the ratings agencies.

Messrs. Glasenberg and Kalmin signaled the moves that were announced Monday were conservative and pro-active, but were taken to reassure shareholders. It will also hold off on dividend payments until further notice and reduce overall debt by almost $10.2 billion. A decline for 2015 would be the metal’s third losing year in a row. South African gold producer Lonmin has said it would cut 6,000 workers over the next two years, while BHP Billiton has eliminated hundreds of jobs linked to Olympic Dam, its giant copper, gold and uranium mine in South Australia. Its 1.25 billion euros of securities due March 2021 rose 4.3 cents on the euro to 92.25 cents, the highest since August. 20, according to data compiled by Bloomberg.

Glencore’s share price has more than halved since May as the commodity price rout and fears over China have battered mining shares.

Copper gained after commodities group Glencore announced plans to shut down loss-making mines to help to reduce a glut of supply that has weighed on prices. His current stake in Glencore is valued at about $2.1 billion, down sharply from the more than $9 billion it was worth after the company’s initial public offering. “It also ensures that copper is probably not going to fall in the same way that iron ore and met (metallurgical) coal have done”.

Glencore said 78 percent of its proposed share issue was underwritten by Citi and Morgan Stanley, while its senior management have committed to take up the remaining 22 percent.

Analyst Oliver O’Donnell at VSA capital said: “Financial leverage has been a key concern for investors and it is positive that GLEN is addressing the issue as its shares have fallen 60% since the start of May 2015”.