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Is Glencore’s share price a sound investment as Moody's upgrades miner?

Despite Moody’s rating upgrade, Glencore's [GLEN] share price has traded relatively flat as the company’s legal troubles continue to spook investors.

Glencore got some good news last week when Moody's Investment Services upgraded its rating for the company.

The ratings agency upped Glencore’s long-term issuance rating from Baa1 from Baa2. It also changed its short-term outlook on the miner from "Stable" to "Positive".

Sven Reinke, a senior vice-president at Moody's explained:

"While we don't expect Glencore's financial profile to strengthen further beyond the level achieved in 2018, sustained low production cost and reduced debt levels have increased the company's resilience to volatile commodity prices."

With the share price having taken a hit from several corruption scandals this year, investors will now be asking why Moody’s has such a positive outlook on Glencore.Glencore 1-year share price performance, CMC Markets, 20 May 2019

 

How has Glencore reduced debt?

As Reinke points out, the reduction of debt was part of Moody's decision to upgrade the stock. Glencore's debt in the most recent quarter came in at £35.06 billion. In relation to company equity, that ratio is an eye-watering 77.26. But Glencore has been proactive in getting itself out of the red, and has halved adjusted net debt since 2014 to $14.7 billion.

The miner is now working on restructuring debt from Katanga Mining, the Canadian mining company that operates the Kamoto Copper Company, a major cobalt miner in the Democratic Republic of Congo (DRC).

Glencore owns 86% of Katanga Mining which has proven to be a troublesome acquisition. Last year, it hit the headlines for misrepresenting production figures and financial statements.

 

Market cap£37.21bn
PE ratio (TTM)11.38
EPS (TTM)24.00
Quarterly earnings growth (YoY)-81.00%

Glencore share price vitals, Yahoo finance, 20 May 2019

 

Following the debacle, Glencore took a more active role in managing Katanga. This included putting a plan together to improve performance and restructure $6.3 billion worth of loans. With net losses growing from $153 million to $218.4 million year-on-year in March, Glencore needs to get Katanga’s house in order.

Although not everyone is happy with Glencore’s cost cutting. Zambia’s President Edgar Lungu threatened to 'divorce' Glencore last week after plans to reduce operations in the country surfaced. Of course, this could all be political gamesmanship. Glencore is the second biggest copper miner in the country. It is also something of a cash cow for the country following Zambia's decision to introduce a new tax system on miners, announced in this year’s budget.

 

Have legal headaches hit investor confidence?

Glencore and other miners have been coming under increased scrutiny for their business practices in resource rich countries.

Accusations of bribery and money laundering have stuck to Glencore. And in April, the share price crashed 4% after the launch of another probe into 'corrupt practices'.

Right now the company is facing investigation from the Justice Department (DoJ) and FBI, as well as Brazilian authorities for the ‘Car Wash’ scandal. Separately the DoJ subpoenaed Glencore over money launderings scandals in Nigeria, DRC and Venezuela. Then there's a CFTC investigation into overseas fraud under the Commodity Exchange Act.

Big fines coming out of these investigations aren’t the only thing to hit Glencore’s balance sheet. Its latest annual report revealed $24 million in lawyers’ fees.

$24million

Glencore's legal costs in 2018

The constant negativity surrounding Glencore has clearly taken a toll on the share price. And if more fines are doled out to the miner, then another major hit looks unavoidable.

 

Is there potential for growth?

Glencore's recent strategy has been an exercise in cost reduction. A continuation of this could reignite investor interest in the stock. One area Glencore could consider is its DRC assets. After all, the sheer level of debt reduction needed to get Katanga mining back on track could make it more trouble than its worth. Any restructuring plan would be difficult to put in place as Katanga pays out $563 million in interest payments. 

Then there's Glencore's coal business. Glencore has announced that it will limit coal production to 150 million tons per year. Instead, it will focus on mining more copper, cobalt, nickel, vanadium and zinc, commodities used in emerging technologies. Of course, this could be considered a win-win scenario for Glencore as restricting coal supply could see prices rise. 

In any case, investors will need a positive signal of some description before piling into the stock again. Glencore’s share price is currently down -3.7% since the start of the year, having hit a year high of £3.43 on 17 April. Over the past 12 months, the stock is down a hefty 27%. But analysts seem to think things will turn around, with Deutsche Bank setting a price target of £3.70. This would represent a 34.97% upside on today’s price.

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