The Goldman Sachs Of The Commodities World

Before its May IPO on the London Stock Exchange and a secondary float on the Hong Kong Stock Exchange, Glencore International Plc ‘s (GLCNF.PK) business dealings were typically described as secretive. Understandable, as the company was famously known for its lack of disclosure.
The world’s largest commodities trading company, with a 60% global market share in the internationally tradeable zinc market, 50% in the tradeable copper market, 9% in the tradeable grain market and 3% the tradeable oil market, was often referred to as “the Goldman Sachs of the commodities world.” Elusive, but highly successful.
This closely held partnership was launched in 1974 by founder Marc Rich under his own name. Not that Glencore likes to mention Rich, as he is considered rather notorious and as such is not even mentioned in the official history on Glencore’s website. Rich escaped Nazi Europe as a seven-year-old, and grew up in the United States. Rich grew to become something of a sensation and some even credit him with the invention of the spot market for crude oil. By 1983, however, U.S. authorities had charged him with evading taxes and selling oil to Iran during the 1979-1981 hostage-crisis. Marc Rich fled to Switzerland, where he lived as a fugitive for 17 years.
Rich has always insisted he did nothing illegal and he was officially pardoned by President Bill Clinton on his last day in the White House in January 2001. Among those who lobbied on his behalf were names like Ehud Barak and Shimon Peres, according to a book by journalist Daniel Ammann (“The King of Oil – The Secret Lives of Marc Rich”) . But by 2001 Marc Rich & Co. had already long changed its name to Glencore International after management had bought out Rich in 1994.
Since 1974 the company had slowly become a leader in sourcing, marketing and trading commodities, now employing thousands of people. And recording revenues of $145 billion as of 2010, the business is now largely split into three divisions; metals and minerals, energy and agricultural products. Glencore’s enigmatic status finally changed when the company went public in May of this year four times oversubscribed, with proceeds to be used for further expansion, capital expenditure for three years and to increase its stake in zinc producer JSC Kazzinc from 50.7% to 90.3%.
Glencore’s IPO was LSE’s largest ever international IPO, with a market capitalization of $59.3 billion (£36.5 billion GBP) at the IPO-price of £5.30 – 530 pence, making Glencore the first company in 25 years to enter the FTSE 100 Index on admission. Management indicated beforehand that the IPO would give it the financial flexibility “to capitalize on long-term growth opportunities,” so basically get busy buying. Longer term the market expects Glencore to attempt to take full control of mining group Xstrata Plc (XSRAF.PK), in which it already holds a 34% stake. “Any consideration of this matter will be for the new board post the IPO,” Glasenberg said pre-IPO. “We’ve always said there would be good value in putting the two companies together but this is not a decision for today.”
For the short to medium term it was reported that Glencore, next to increasing its stake JSC Kazzinc, was studying a $19 billion takeover bid for Eurasian Natural Resources Corp (EURNF.PK), but was already expected to encounter difficulty in doing so. Because of ENRC’s complex ownership structure, Glencore would have to deal with Kazakhmys Plc (KZMYY.PK), which has a 26% stake, the Kazakh government, which holds 12% and ENRC’s founders Machkevitch, Ibragimov and Chodiev which each hold 15% stakes. After Glencore published a press release on June 15th that it was “not in active consideration of an offer” the U.K. Takeover Panel barred the company from bidding for ENRC for six months.
In the first few months since the IPO Glencore shares have taken a hit after several brokers cut their target prices. MF Global even issued a “sell” note and cut its target price to just 390 pence. Deutsche Bank remained more confident, but also reduced its target from 650 to 620 pence for GLEN.L, saying investors should “expect near-term headwinds.” Glencore’s CEO Ivan Glasenberg did report a 47% surge in Q1 profits in his maiden results to the stock market, but the market was mainly focusing on a 20% reduction in Glencore’s trading profits from metals and minerals.
Last week Glencore issued its second earnings report since it listed in May, the company now reporting a 57% rise in H1 net income to $2.45 billion, due to strong performance in its marketing and industrial activities. Despite the market price now hovering around 400 pence, some 25% below its May IPO, management doesn’t seem particularly concerned with Glencore’s overall performance. “The short-term volatility caused by renewed bearishness on sovereign debt in developed markets is of course a concern to us,” said CEO Ivan Glasenberg. “However, the company remains optimistic about long-term global economic prospects, and that the trends that underpin the growth of Glencore’s business are firmly in place.”
He further stated that the recent market turmoil did not show any material impact on demand. “Asian countries continue to grow and fast paced urbanization in China, the world’s largest consumer of many basic commodities, continues to fuel robust demand for commodities. Even America, where U.S. debt woes have raised concerns about frail economic growth, demand is flat with signs of improvement emerging.” Glasenberg believes Glencore will continue to deliver good results in the second half of 2011, as he remains bullish about commodity prices and sees buying opportunities due to current market turmoil.
There are several reasons why I’m currently contemplating making an investment in Glencore and I will name a few. When the investment banks were valuing Glencore pre-IPO, just a few months back, a value of $60 billion was considered on the “conservative” side, given the company’s 2010 net profit and typical earnings before interest, tax, depreciation and amortization (EBITDA) multiples in the industry. Glencore posted EBITDA of $6.2 billion for 2010. Most research notes valued the company in the $52 to $70 billion-range, medium around $63 billion, significantly higher than current market value.
What you get with Glencore is a bit of a one-of-a-kind investment, a specialized company in an unusual sector and a business that investors do not typically have a chance to get exposure to. Marc Rich & Co. and subsequently Glencore has been a privately run company of 37 years and made a truckload of money along the way, which clearly shows they know what they’re doing and with a bit more market intelligence than most. It’s obviously extremely well run and this IPO has given Glencore just that bit more firepower for further acquisitions and will allow them to do larger deals.
Glencore’s main rivals are Vitol, Trafigura and Cargill, with Cargill arguably its closest peer. Cargill, which is still privately held, is also a large trader with a global footprint. The main difference between the two companies is that Glencore is more diversified, has more valuable industrial assets and that we as investors can now profit from its operations.

On the subject of assets, I already mentioned several of Glencore’s stakes, its 34% stake in Xstrata most prominently. To list a few more, Glencore also owns 8.8% percent of United Company Rusal (RUSAL:PAR), the world’s largest aluminum company, 74% of Katanga Mining (KATFF.PK), 71% of nickel miner Minara Resources (MREJF.PK), alongside further stakes in companies like Century Aluminum (CENX) and leading zinc producer Nyrstar (NYRSF.PK).

Glencore has an outstanding management team with Ivan Glasenberg as CEO, Steven Kalmin as CFO, Simon Murray (former Vodafone) as non-executive chairman, Tony Hayward (former CEO BP) as senior independent director and Peter Coates, Leonhard Fischer, William Macaulay and Li Ning as non- executive directors. Glencore has promised investors a progressive dividend policy and recently declared a maiden interim dividend of $0.05 a share.
When Warren Buffett recently announced he would be taking a $5 billion stake in Bank of America (BAC) in exchange for preferred stock with 6% and warrants to purchase another several hundred million shares, it was the first time since investing in Berkshire Hathaway (BRK.A) (BRK.B) through BRK.B that I scratched my head a bit. It immediately gave me a flashback to 2008 when Buffet and Munger decided to buy $5 billion in preferred stock of Goldman Sachs (GS). The only difference of course is that Goldman Sachs was and is still considered “the smartest kid in the class,” while Bank of America Merrill Lynch nowadays is more often than not referred to as the “slow-witted chubby kid in the back” first to get hit when a savings and loan-crisis, dot-com bubble or sub-prime mortgage and credit-crisis decides to pop up.

I quickly remembered Buffett and Munger’s virtually unparalleled investing record over the decades. I thought about the infamous “margin of safety.” I remembered why I actually invested in BRK.B in the first place. But the last thing that came to mind was Buffett’s statement in “The Snowball” that in this day and age it was increasingly difficult to find undervalued stocks that other people often didn’t find. I am under no illusion that Warren Buffett or Charlie Munger is roaming around Seeking Alpha reading blogs and articles, but fortunately we all are and trying to educate ourselves in the process. But in the unlikely event they are, I would hereby like to end by saying: “Mr. Buffett, hereby I present for your investment consideration: Glencore International.”

Contributor: Retracement


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