Executive Summary
Commodities trading giant Glencore recently released its IPO prospectus with an eye towards a public equity offering in London and Hong Kong later this month. The majority of this massive filing, a daunting 1,600+ page document, consists of third-party technical reports on key properties including Prodeco (Colombia thermal coal), Katanga (DRC copper), Mopani (Zambia copper), Mutanda (DRC copper), and Kazzinc (Kazakhstan).
While we think the independent assessments are, in most cases, a bit too aggressive in their valuation of Glencore's key properties, they're nonetheless very useful to investors, given the extensive detail provided therein. By contrast, the level of detail provided by Glencore itself on its globe-spanning trading and marketing operations left much to be desired. Investors seeking a better understanding of just how much of the marketing arm's profits are attributable to basic supply chain activities and arbitrage—as opposed to speculative directional bets—won't find much hard data on which to base a conclusion. Given the critical importance of this issue to valuing Glencore as a whole, we'd encourage prospective investors to exercise caution.
Key Takeaways
-- Glencore shares offer an interesting way to play secular commodities demand growth. In addition to the high-beta mining cash flows that investors can obtain from any number of mining stocks, Glencore also offers exposure to lower-beta marketing cash flows that should suffer less in a sharp and sustained commodity price slump.
-- Glencore's marketing operations remain a black box. It's unclear how much of Glencore's trading profits stem from basic supply chain activities and arbitrage opportunities versus speculative directional bets on commodity prices. While the profits generated by Glencore's marketing arm are less correlated with commodity prices than those churned out by it very cyclical mining operations, we'd be cautious about assigning a particularly hefty multiple to the marketing profits.
-- Glencore's best mining assets carry an unusually high degree of country risk. In addition to its large equity stake in mining giant Xstrata (XTA), Glencore owns some attractive mining assets in its own right. That said, we note that the preponderance of Glencore's most valuable assets are situated in high-risk countries like the Democratic Republic of Congo (DRC), Kazakhstan, and Zambia. All else equal, Glencore's mining assets deserve lower valuation multiples than comparable firms with operations in lower-risk jurisdictions. We don't think this is adequately reflected in the 10% discount rate employed in the third-party technical reports.
-- The elephant in the room goes unmentioned (directly at least). The prospect of a merger with Xstrata isn't specifically addressed in the voluminous IPO prospectus, but some form of combination between the two is undoubtedly top-of-mind for Glencore CEO Ivan Glasenberg and his counterpart at Xstrata, Mick Davis. While not explicitly discussed, one could interpret the prospectus' repeated references to the value of vertical integration as an oblique means of laying the groundwork for a future pitch to Xstrata investors. Indeed, to convince Xstrata shareholders to go along with a "no premium" tie-up, Glencore would need to demonstrate that Xstrata's mining assets would be more valuable were they enmeshed in the globe-spanning web of marketing and supply chain assets Glencore brings to the table.
