LONDON (AP) - Commodities group Glencore PLC saw its share price plunge by around a third at one point Monday after a warning from an investment bank stoked concerns over the ability of the company to service its sky-high debts - if battered commodity prices don't recover.
LONDON (AP) — Commodities group Glencore PLC saw its share price plunge by around a third at one point Monday after a warning from an investment bank stoked concerns over the ability of the company to service its sky-high debts — if battered commodity prices don't recover.
In a note to clients, Investec Securities said mining companies were clearly struggling in the face of lower commodity prices, largely due to the slowdown in China, but that Glencore was particularly exposed because of its debt mountain of around $30 billion.
Sentiment toward Glencore, which is based in Switzerland but has a share listing in London, has been fragile for months as investors have fretted over the impact of lower commodity prices on earnings and the company's ability to meet its debt repayments.
Commodity prices have been dented for a variety of reasons, but all have suffered from worries over the scale of the slowdown in China, which has had a voracious appetite for commodities. Copper, for example, is trading near six-year lows.
Investec analyst Hunter Hillcoat warned that Glencore could end up in the situation where it's "solely working to repay debt obligations" if commodity prices don't recover. Under such a scenario, Hillcoat said value for Glencore equity holders is "virtually eliminated."
That unappetizing proposition prompted a savage sell-off of Glencore shares, which at one stage Monday were down 32 percent at a record low 66.7 pence. By late afternoon trading, Glencore's share price had recovered somewhat to trade 23 percent lower at 73.70 pence.
Glencore's fall from grace has gathered pace ever since it floated in 2011 at a share price of 530 pence, a listing that valued the company at a little less than 40 billion pounds ($60 billion).
China is at the heart of Glencore's difficulties. Miners — not just Glencore — sought to take advantage of China's booming economy at the turn of the decade when many of the world's leading economies were struggling to emerge from the global financial crisis and the ensuing recession.
According to Investec's Hillcoat, mining companies "gorged themselves on cheap debt in a race to grow production following the Chinese stimulus that occurred in the wake of the global financial crisis" and that the consequences of that "are only now coming home to roost, as mines take a long time to build."
Debt, said Hillcoat, "is fast becoming the most important consideration for mining company management."
Glencore is clearly aware of its problems. Earlier this month, it announced a package of measures, from asset sales to suspending dividends and raising cash from existing shareholders that it hopes will reduce debt by $10 billion. But even if all that plays out as expected, Glencore will be left with a debt mountain of around $20 billion, which is still above its market value — after Monday's share price plunge, Glencore's value stands at about $17 billion.