It’s Time for Glencore to Embrace Change

(Bloomberg Opinion) -- Ivan Glasenberg has built up a formidable commodities giant. The Glencore chief executive officer's resolute belief in the counter-cyclical value of a trading business paid off in the first half of 2020, with an oil bonanza that helped ease blows dealt by the coronavirus. Impairments still dragged it to a $2.6 billion net loss. The past two years haven't been kind: The group is still under investigation over possible corrupt practices, coal has crumbled and the stock has underperformed traditional mining heavyweights. 

Glencore could do worse than to take the pandemic hint and revamp its investment proposition, with less of the black stuff and greener assets to get ahead of peers in a sector that hasn't been a leader in environmental, social and governance terms. That might include completing a long-signposted change at the top. All but one of the old guard of divisional heads who became billionaires alongside Glasenberg when the miner and trader listed in 2011 have now left. With a shift away from past fiefdoms and a new generation in place, the company can at last outline an exit date, a new boss and its next act.

Not all of the group's troubles are within its control, or indeed avoidable. It can't speed up investigations, and is already cooperating. Meanwhile, an unexpected, gravity-defying surge in iron ore, which Glencore doesn't mine, has masked plenty of problems at rival diggers. The Covid-19 pandemic also took its toll: Earnings before interest, tax, depreciation and amortization for the first six months came in at a forecast-beating $4.8 billion, but still fell 13%. It wrote $3.2 billion off the value of Colombian coal, Chadian oil, African copper and Peruvian zinc. Even its oil trading win pushed up a debt burden already higher than most peers, and forced the company to scrap dividends for the year.

It can, though, tell a better story, at a time when even oil majors are going green.

That involves, first and foremost, tackling coal. It still helps fund Glencore's more eco-friendly activities like battery ingredients copper, cobalt and nickel, but coal margins have shrunk to 23%, half where they were in 2018, and that's not just a temporary coronavirus hit. The world's largest thermal coal exporter capped production last year, and said last week it would cut back in light of oversupply. Glencore has resisted more dramatic strategic moves, arguing the material can recover, given limited new supply and Asian demand, and remain profitable, and that it doesn't make up enough of its earnings to scare investors. With demand in places like Vietnam looking less bright, and ESG pressures only increasing, that's a challenging argument to defend. 

Options include spinning off coal assets (thermal and less significant coking coal), following the path set by BHP Group with South32 Ltd. Fund manager distaste for an all-coal business, though, may push it toward a private solution, if enough backers can be found to build a coal powerhouse to feed Asian buyers. That's looking cheaper than a year or so ago: Assuming annual Ebitda of roughly $1.3 billion for 2020 at current prices, and the multiples on which coal rivals like Whitehaven Coal Ltd. trade, a specialized entity could be worth roughly $9 billion. Neither of these alternatives is yet on the table. Keeping it isn't impossible, of course, but as with BP Plc and oil, Glencore may require more evidence of a change of focus, perhaps even the retirement of its former coal trader boss. 

Parting company will be a challenge. Glasenberg's pugnacious charisma has been key to Glencore's lure. When it listed in 2011, as the rest of the mining industry was cleaning up after wasteful deals and over-priced projects, he was among the first to press for a focus on returns. He wasn't only a leader, but a major shareholder with skin in the game, as he liked to remind investors. That glow hasn't faded entirely and he is still the second-largest owner, but Glencore shares are worth less than half what they were less than a decade ago. Including reinvested dividends, the stock has generated a negative 51% total return for investors since 2011. Not all African operations have lived up to expectations, and even trading hasn't been consistent.

After his departure, Glasenberg will remain a strong voice, with 9% of the stock, a holding he has said he won't sell under his replacement. It might be a good time to give a well-established board a few new faces.

Yet Glencore's traders have always been famed for their impeccable timing. With ESG the company is falling worryingly behind, and not just with coal. It has shifted investment plans to green metals and has a credible 2035 target for closely watched Scope 3 emissions, the greenhouse gases released by clients, but it's one that relies largely on the inaction of allowing assets to deplete. The company recorded six fatalities in the first half, and embarrassingly few women at the top. Glencore can clean up faster.

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

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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