LONDON (Reuters) - What's Glencore worth? Getting a straight answer to this question depends as much on risk appetite as it does a shrewd analysis of the bombed-out commodities sector.
There are plenty of obvious risks ahead for Glencore shareholders: the miner and commodities trader is exposed to a brutal sell-off in raw materials, an emerging-markets slowdown and a poor credit outlook - courtesy of a Standard & Poor's outlook cut - that may threaten its dividend policy.
However, some bargain hunters see value in the stock, which surged 6.6 percent on Thursday alone after slumping more than 50 percent since early May on concerns about a slowdown in economic growth in China, the world's top metals consumer.
The rally came despite S&P cutting its outlook for Glencore to "negative" from "stable" after slashing its forecasts for metals, saying continued weakness in commodity prices due to a challenging outlook in China may put pressure on Glencore's operations, credit measures and free cash flow.
"The possibility of Glencore cutting its dividend is largely priced in. It has been a disastrous period, but the contrarian in me suggests that it's time to buy bombed-out commodity stocks like Glencore," David Battersby, investment manager at Redmayne-Bentley, said.
"We are invested in Glencore and are actively looking to increase our exposure to the sector."
Thomson Reuters data shows Glencore trades at 7.3 times its 12-month forward earnings, against 12.7 times for the STOXX Europe 600 Basic Resources Index. Its dividend yield is about 9 percent, against an average of 4 percent for its peers.
But some fund managers remain cautious and said Glencore's shares could become relatively expensive again due to its poor earnings outlook. Analysts' forecasts for Glencore's earnings per share (EPS) have been falling, down 20 percent in just one month, which in turn could lift its price-to-earnings ratio.
Glencore reported last month a 29 percent slump in first-half earnings and said tough market conditions, especially for aluminum and nickel, were hurting the business even though it had previously said the trading division would meet earnings targets whatever happened to commodity prices.
"Investors should avoid their exposure to commodity players like Glencore. The P/E ratios might dramatically change in the next guidance by analysts and the stock may look expensive again. Dividends are also unlikely to be maintained," Lorne Baring, managing director of B Capital Wealth Management, said.
Baring said he was avoiding commodity-heavy Britain's FTSE 100 index and instead focusing on companies in Germany's DAX and Switzerland's benchmark index, besides investing in commercial real estates.
There were many in the market who said that S&P's downgrade raised credit risks for the company and they would wait for some stabilization in Glencore's share price and more clarity about its dividend policy and capex plans before jumping back in.
"The underlying cost of capital for big companies like Glencore is really going to start to bite as commodity prices fall, and their ability to raise money is made a little bit more difficult," Jonathan Roy, advisory investment manager at Charles Hanover Investments, said, adding he was positive on financials instead due to the ECB's bond-buying operations.
JPMorgan Cazenove analysts said Glencore was still over-leveraged at about 3.5 times its ND/EBITDA (net debt to earnings before interest, tax, depreciation and amortization) and its measures to mitigate credit risk could include a cut to its $2.3 billion dividend, a $4-$5 billion reduction in working capital and deeper capex cuts.
According to Thomson Reuters data, Glencore's debt to equity ratio is currently at nearly 110 percent, against 54 percent for Rio Tinto and 39 percent for Antofagasta.
"The market appears to be penalizing Glencore for its geared balance sheet – the prospect of a significant recapitalization will weigh down on the share price and the sector," John Meyer, analyst at mining brokerage SP Angel, said.
Additional reporting by Kit Rees; Editing by Lionel Laurent and David Evans