Glencore's Lawyers Get Set for Another Pay Day

(Bloomberg Opinion) -- In 2018, Glencore Plc incurred $24 million of legal and other costs in relation to a U.S. Department of Justice investigation into its compliance with bribery and money-laundering rules when doing business in the Democratic Republic of Congo and elsewhere. The miner-cum-commodities trader spent another $45 million consulting lawyers and experts about the various ongoing investigations in the first six months of this year, its accounts show.

So news that the U.K's Serious Fraud Office has also opened an investigation into suspicions of bribery is probably bullish for the London and Swiss legal community (the mining giant is listed in the former and based in the latter). For Glencore shareholders, however, it's a bitter reminder that the globe-spanning group can't easily move on from its legal troubles; the shares slumped 8% on Thursday to a three-year low.

Earlier this week Glencore's 62-year-old chief executive officer Ivan Glasenberg hinted that his almost 18-year tenure was drawing to a close. After a succession of senior departures, he's one of the last top managers remaining from the company's pre-initial public offering vintage.

He also committed this week to further cutting Glencore's ratio of net indebtedness to Ebitda (a measure of cash earnings). In that respect, Glencore is a less risky proposition than it was in 2015, when its shares collapsed because of leverage worries. As such, it can withstand the legal uncertainty around some of its alleged previous activities. Even allowing for heavy investments, the company thinks it can generate about $4.4 billion of free cash flow next year if commodity prices remain the same. It's promising a dividend of at least 20 cents — a pretty decent yield of 7%.

Nevertheless, even if Glasenberg makes way for a new generation, his successors will probably remain bogged down by many of the same problems.

Glencore hasn't made a provision in its accounts for its legal woes because it's unable to estimate the quantum of fines and legal damages that could arise. While Glencore says it will cooperate with the SFO probe, it didn't provide further details. Absent better information, some investors will be inclined to worry.

And then there is Glencore's continuing commitment to thermal coal, despite overwhelming evidence that burning the stuff is contributing to a global climate crisis. This gives sustainability-minded investors another reason to avoid the shares.  

Thursday's dramatic sell-off, following formal confirmation of an investigation some people thought was coming anyway, merely underscores the volatile nature of Glencore as an investment. Glasenberg's departure wouldn't change that.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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