JOHANNESBURG - Glencore ditched its annual dividend after net debt surged, because the commodities giant poured money into its trading business to cash in on volatile price swings.
The company put the payment on hold earlier this year as it moved to protect itself from potential shocks from the coronavirus pandemic. Glencore bet heavily on oil when prices collapsed earlier this year, leading to record gains but also a spike in its debt. That, combined with uncertainty over the near-term outlook, prompted a decision to cancel the dividend.
It went all in on trading during the worst of the pandemic, with the board taking the unusual decision to increase limits - raising the risk of losing more money than usual, but also providing room for bumper gains.
The bet paid off: Glencore’s trading business earned $2billion (R34.6bn) in earnings before interest and tax, double the returns it made a year earlier, the company reported yesterday.
However, net debt rose to $19.7bn, well above a target of between $10bn and $16bn. Glencore shares fell 4.1percent by 8.17am in London, extending this year’s decline to 20percent. On the JSE the shares closed at R41.73.
“The outlook remains highly uncertain in the short term, particularly from the risk of second wave infections in key economies,” chief executive Ivan Glasenberg said in a statement. “Notwithstanding our cash-generative business and secure liquidity positions, the board has concluded that it would be inappropriate to make a distribution to shareholders in 2020.”
Glencore would focus instead on reducing borrowing, and expected to be back within its target range by the end of the year, Glasenberg said. The company would review restarting the dividend next year, he said.
Yesterday’s announcement is the second time Glencore won’t pay an annual dividend since its initial public offering less than 10 years ago. It comes during a tumultuous period for the company.
Glencore is facing ongoing corruption probes in the US, Brazil, and the UK, which have spooked investors in recent years. At the same time, the world’s biggest commodity trader is preparing for a change of power at the top.
Glasenberg has said he’s in the process of looking for a successor and other top managers from the old guard are also being replaced.
The company didn’t give any more details on the timing of that succession plan in yesterday’s report. Glasenberg said he’s looking forward to working with the newly appointed senior executives.
Glencore has underperformed mining rivals. The record first-half trading profit helped offset the effect of weaker prices for commodities that Glencore mines. Once again, the company has missed out on an iron rally that provided bumper earnings for its biggest rivals, such as Rio Tinto Group and Anglo American, because it doesn’t produce any. Instead, Glencore’s mining profits are driven by coal and copper.
While copper prices have been resilient through the pandemic, thermal coal has crashed, falling to the lowest levels since the commodity crisis five years ago. That contributed to a 13percent fall in first-half core earnings.
The company reported a net loss of $2.6bn, after it recorded impairments of $3.2bn net of non-controlling interests and tax, including write-downs on its oil operations in Chad and Zambian copper operations.
The collapse in thermal coal prices also prompted Glencore to take more write-downs on its Colombian mines. For the second time this year, the company lowered the value of its Prodeco and Cerrejon assets.
Last week the company announced that it was cutting thermal coal output by 14percent this year as it sought to protect prices. Glencore has a long tradition of cutting output to support prices, having held back production in commodities such as zinc, coal and cobalt in recent years after prices weakened.
BLOOMBERG