March 13, 2011 / 12:11 AM / 7 years ago

Slim mining margins may cloud Glencore's IPO value

LONDON (Reuters) - Slim margins at Glencore’s GLEN.UL mines and smelters could hamper the Swiss commodity giant’s efforts to attain a premium valuation from a planned multi-billion-dollar listing.

The narrow ratios contrast with better overall margins than its nearest listed rival, Noble Group (NOBG.SI), and further muddy the picture for prospective investors weighing up a firm that is a mixture of trader, miner and investor.

A partial explanation is that margins are depressed as Glencore invests in new projects such as Kazakh gold mining, and in ramping up production at big existing mines -- holding out the prospect of greater future profits, which it is likely to detail in any initial public offering (IPO) prospectus.

Still, some analysts say they also highlight the contrast between Glencore’s ethos and that of London’s two biggest listed miners, BHP Billiton (BLT.L) (BHP.AX) and Rio Tinto (RIO.AX) (RIO.AX), who focus on so-called “Tier One” assets -- world-class mines that are big, cheap, and easily expandable.

“Margins are key,” said one experienced mining analyst. “The margin differential between a West Australian iron ore business and a Congolese copper business is like day and night.”

Such differences determine which businesses generate the best cashflows, and in turn drive market valuations. Glencore’s asset base, this analyst added, reflected a “far, far more opportunistic” approach to acquisitions.

“Glencore doesn’t sit down like BHP does and says, ‘I want to own these commodities in these geological basins, and this our valuation when they come up for sale’. It’s a different philosophy.”

Glencore is seeking the permanent capital that comes with a listing, freeing it from the uncertainty of a private partnership where payouts to departing partners shrink the capital base. An IPO would also help it make larger acquisitions.


Glencore’s annual report breaks out core earnings from production and trading in its energy, metals, and agriculture divisions, and the “corporate” segment, which includes its 34 percent stake in Xstrata Plc XTA.L.

Last year’s biggest generator of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) was the mining segment’s “industrial” operations.

But the segment’s EBITDA margin, at 25.5 percent, contrasts with 34 percent at Xstrata, and even more sharply with BHP, where first-half underlying EBITDA was about half of revenues.

A business whose margins lag its peers is likely to be valued at a lower multiple, because smaller upsets to revenues or costs can have a bigger effect on profits.

    Glencore is likely to argue that a better comparison is Noble Group, the Singapore-listed commodities trader, which like Glencore also owns production facilities and equity stakes -- in Noble’s case, in Australia’s Gloucester Coal GCL.AX.

    Noble trades at an enterprise value of about 14.1 times last year’s EBITDA, Starmine data shows, versus an average 6.45 times for London’s big four miners.

    But here the picture is also less than straightforward.

    Noble does not break out separate industrial and marketing results, and gets a bigger slice of its revenues from agricultural commodities, including coffee and cocoa, while Glencore is bigger in metals.

    And while Noble’s overall EBITDA margin, at 2.15 percent last year, was roughly half of Glencore‘s, its business appears far less volatile. The financial crisis led to a 43 percent fall in Glencore’s net income in 2009, while Noble’s barely budged.

    In January, Liberum Capital estimated Glencore’s equity was worth about $60 billion (37 billion pounds). That would imply an enterprise value of about 12 times last year’s EBITDA, including Glencore’s $14.8 billion of net debt.

    Glencore declined to comment.

    additional reporting by Julie Crust; editing by Alexander Smith

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