Glencore is making headlines! The mining and commodities trading company lost almost 80% of its market value within a couple of months and investors around the globe are getting cold feet. Yesterday, however, the stock recovered miraculously 17% after “a host of brokers” on the same day reassured investors of its creditworthiness. Time to buy?
I just had a large grin on my face, when I heard all those sell-side brokers making a case for Glencore. I am not buying it! Here are five reasons why:
- Price drops not a reason to buy: Just because a company lost substantially in value is not a reason to buy. Even though I always pay attention, when a single company experiences a negative event such as Volkswagen now, or Knight Capital a few years back.
- Complex structure: I don’t understand the balance sheet and ownership structure. For me, Glencore is a very opaque, complex and intransparent company. Mining itself is a complex industry that certainly requires experience and expertise to get comfortable investing – I don’t feel comfortable investing – yet!
- Solid Debt, shaky equity: From the looks of it, shareholders are not in control of the company anymore, even though they have done a capital increase recently (Sep. 2015) and CEO Ivan Glasenberg participated. It doesn’t convince me. Too much financial risk solely depending on commodity price movements with increasing pressure from banks and debt holders. No thank you!
- Desperate hope: The management team and bankers around Glasenberg seem to assure everybody that credit is healthy, divestment plans will be great, and they will have less exposure to price movements – basically, the market has it all wrong. Sounds awfully familiar. If the largest mining and commodities trading company is forced to start selling assets or commodity positions, the market will take a long time to offer competitive prices.
- Doubtful ethics: I am not a proponent, nor a fan of socially responsible investing (SRI). For me, it is an elaborate marketing strategy to attract assets from investors. Nevertheless, Glencore’s records for strong-arm tactics in securing mining rights and dealing with environmental issues go far beyond of what is tolerable as a publicly traded mining company. I am not supporting it.
Here you have it. I might miss out on an outstanding opportunity and so far from yesterday’s price movement, it looks like it. If it does recover, it will shoot up like a rocket, because of its massive debt position. If it doesn’t, shareholders will lose all and bondholders take over. Personally, I make use of my most powerful weapon as an independent and private investor, to say: No, thank you!