Glencore Returns to Profit on Commodities Boom -- 2nd Update

By Scott Patterson 

LONDON-- Glencore PLC rode a wave of surging commodity prices in 2016 to return to a profit of $1.4 billion, marking a head-snapping turnaround for a miner that faced an investor revolt just 18 months ago.

With cash hordes now burgeoning at the world's No. 4 mining company by market value, Chief Executive Ivan Glasenberg now faces a tough decision: start splurging on new mergers or acquisitions, or return the rewards to shareholders in the form of dividends.

Mr. Glasenberg--known as one of the mining industry's most voracious deal-makers--appears to be leaning in a surprising direction: dividends.

"I don't think there's big stuff around to look at, but we'll see what opportunities come," the CEO said about potential deals on a conference call with reporters Thursday. "If we don't find big opportunities, we'll kick out big dividends."

Mr. Glasenberg said Glencore could eventually contemplate returning a special dividend to shareholders as high as $20 billion, a move that would benefit the CEO who, along with other senior management, is a major shareholder. The company earlier said it plans to pay out $1 billion in dividends in 2017.

Shares in the company were up more than 4% in early-afternoon trading in London.

It is a big change for the swashbuckling executive known for pulling off some of the biggest deals in the industry, including the $29.5 billion deal to merge with Xstrata in 2013. Two years ago, the talk of the industry was a potential merger between Glencore and Anglo-Australian behemoth Rio Tinto PLC, a deal that would likely have created the biggest mining company in the world.

The more conservative approach could raise questions about whether Glencore's days of meteoric growth are behind it.

Since its IPO in 2011, Glencore had been distinct from other mining giants like BHP Billiton Ltd., which were attractive to investors for steady dividends. By contrast, Mr. Glasenberg offered a narrative of deals and earnings buoyed by the company's powerful trading unit.

Mr. Glasenberg's emphasis on dividends is "a shift in focus for Glencore, " said John Meyer, an analyst for SP Angel in London. "Glencore has traditionally been highly acquisitive." Now, a tighter balance sheet is causing Glencore's strategy to shift "to one of cash generation, debt reduction and cash returns to shareholders," he said.

It is the latest sign of how much Glencore has changed in the past year and a half. Back in the summer of 2015, its share price took a dip, including a 29% drop in one day, as investors punished the company for high debt levels amid what was then a brutal downturn in commodity prices.

Since then, Glencore pared back debt, cut spending and sold off $4.7 billion in assets in an effort to mend its debt-laden balance sheet. A sharp rise in commodity prices last year also helped boost the firm's cash flow, with metallurgical coal almost tripling and copper 27% higher.

On Thursday, Glencore reported net income of $1.4 billion for 2016, compared with a $4.9 billion net loss the previous year. Net debt fell to $15.5 billion by year-end from $25.9 billion at the end of 2015, below the lower end of the range of its guidance of $16.5 billion to $17.5 billion.

Glencore's earnings are the latest positive sign from the mining sector. BHP Billiton and Anglo American PLC earlier this week also returned to profit. On Thursday, Vale, the Brazilian mining giant, said it returned to a net profit of $525 million in the fourth quarter of 2016.

Mr. Glasenberg said reduced supplies in key commodities such as copper, coal and zinc were a big reason why commodities soared in 2016. The CEO has long criticized his competitors for ramping up supplies in the face of falling prices. Glencore in the past few years has cut back production in its zinc, copper and coal operations, moves Mr. Glasenberg said provided support for the prices of those commodities.

"There wasn't this massive new increase in supply" last year, Mr. Glasenberg said. "You saw voluntary cutbacks, ourselves, we were one of the leaders."

Glencore said its trading business posted earnings before interest and taxes of $2.8 billion last year, a 14% gain from 2015, amid stronger demand, particularly from China, and drops in inventory levels.

It expects its trading group to report adjusted earnings in the range of $2.2 billion and $2.5 billion in 2017. That is lower than previous years' guidance of as much as $3.2 billion, due to its sale of half of its agriculture division last year.

Write to Scott Patterson at [e-mail]

(END) Dow Jones Newswires

February 23, 2017 08:06 ET (13:06 GMT)

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