Glencore faces its balance sheet

Week Beginning: 05.10.2015

Glencore plc is an Anglo–Swiss multinational commodity trading and mining company headquartered in Baar, Switzerland, with its registered office in Saint Helier, Jersey. 

Back in September the companies CEO Ivan Glasenberg touted a new plan to rescue his flailing company.

 He said “We have pitched our balance sheet for Armageddon.” 

At that time Glencore was trading at £1.31 which declined to to £0.70 a 46% decline in a few days. In 2011 the companys shares were worth more than £5.00. 

Two reasons for the Glencore Apocalypse are Copper and their debts.

The mining and commodities trading company faces a huge issue. It is not profitable, it is highly indebted and holds little cash.  Their fortunes are heavily dependent on the price of copper, which is going down.

 Looking at Glencores finances, the business has on paper roughly $US100 billion in liabilities on its balance sheet and only $US3 billion in cash. It has to be added that the key phrase for businesses in this case is “on paper.” But traditional accounting principles make its numbers look worse than they are. In reality this looks different. Glencore owns more than some mines, it also trades commodities in its marketing division. These trades are also hedged with other trades, so that the company isn’t exposed to unexpected moves in prices.

Although Glencore believes it has the kind of scale and assets that will allow it to thrive in the long term, the stock market predicts differently. Its financial statements at the end of the first half of 2015 were.

Revenues: $US85.7 billion                                                                                               

Cost of goods sold: $US83.6 billion

Gross Profit: $US2.1 billion

This shows that the company’s gross profit is only 2% of its revenues. This is a very small safety of margin for the company. The company is basically spending $US84 billion to make $US86 billion, every six months.

Their competitor (Anglo American) had a gross profit margin of 16% of revenues in 2014. Glencore has to expand their safety of margin if the price of copper goes up again.

 Right now, copper trades at around $US5,000 per metric tonne. Back in 2011 it was twice the price.

Unsurprisingly, once you account for Glencore’s other costs, it loses money:

• Expenses (highlights):
• Admin/sales: $US636 million
• Interest expenses: $US786 million
• Net income: -$US817 million

The company had hardly any cash on its balance sheet, just $US3 billion at the end of June 2015. 

The problem is that Glencore is heavily indebted and spends a huge amount of money servicing its debts and loans. Their liabilities for 2014.2015 include the following:

If you add current and non-current liabilities the company owes $US100 billion, even though it only has $US3 billion in cash on hand. Not all liabilities are the same. If investors look at the company, Glencore shows then their “net debt”. 

Net debt is defined as the debt left over if the company were to sell all its “readily marketable inventories,” which are assets it believes can be liquidated so quickly they essentially function like cash.

 This includes the following:

 All in all Glencore makes $US4.6 billion in profits, holds $US3 billion in cash, and only has $US30 billion in debt. This looks more manageable.

This article links to several concepts of the CUEGIS. First of all it links to strategy, since the balance sheet and the income statement are both startegies to get an overview of the money flowing into and out a business and where it is exactly spent. These strategies help the company in situations like this to have an overview of their finances. Therefore makes it easier to solve this problem. It also links to strategy in a way that many companies have startegies to make their balance sheets to look nicer, than it actually is, Window dressing. 

In this case it could also link to ethics to some extent, since the company is trying to put their finances as best looking together for possible investors. This might be profitable for the company, but not for investors or banks, since they do not know the truth about the actual financial problems about the company. 

Furthermore it links to Change of the CUEGIS, since it is a change for the company Glencore. The company is experiencing a decline stage for their profit. Since in 2011, the copper price was higher and the company made much more profit than now, Glencore has experienced better stages for their revenue. 

This article then also links to several topics in the syllabus. It sums up the principle of final accounts, such as the balance sheet and the income statement, perfectly. It also covers the area of the break even analysis, since the company is having such a decline in profit that their safety margin is constantly decreasing, which makes them closer to their break-even point. The article also links to Marketing, with the product life circle. Although the article is not exactly about a product, but the principle of the product life circle can be applied in this case too, such that Glencore is in its decline stage of sales/profit. 

All in all the company has to consider all factors above, in order pay off their debt and make profit again.