Today I am looking at why investors should steer clear of diversified digger Glencore (LSE: GLEN).
Volatile share prices set to pinch?
To say that Glencores share price has endured a bumpy ride during the past year would be something of a colossal understatement. As worsening supply/demand balances have pushed commodity prices relentlessly lower during the past few years, Glencores value has steadily eroded and the firm has slipped by almost two-thirds during the past year alone.
But perky investor appetite has helped propel prices 68% higher from the record troughs of 68.6p hit in late September. Its hard to second-guess Glencores next move, as edgy investor sentiment prompts much market volatility, but with data from China expected to carry on being disappointing I believe the diggers share price is in danger of lurching lower once again as traders cash in on recent strength.
Indeed, as the Chinese economy continues to cool sharply, and production across many key commodities like copper and iron ore heads resolutely higher, earnings projections across the mining sector continue to take a pasting. Indeed, Glencore alone is expected to punch an 57% bottom-line dip in 2015 alone.
This murky outlook prompted the business to shelve its dividend policy in September in order to build its balance sheet, a sensible option particularly as net debt currently stands at a vast $30bn. Still, this decision will leave many income investors disappointed, and while other dividends across the mining and energy sectors are also expected to come under pressure, only Glencore has decided to can shareholder rewards. Commodity bulls may therefore be tempted to look elsewhere.
Deterioration across all commodity classes
Personally speaking, however, I wouldnt consider investing in any of the worlds metals or fossil fuel producers given the likelihood of further pressure for resources prices. Indeed, bellwether metal copper came within a whisker of hitting fresh six-year lows in late September, despite a number of miners including Glencore vowing to cut production. And prices are currently heading back towards the $5,000 per tonne marker yet again.
The latest London Metal Exchange laggard to hit the buffers this week is aluminium three-month futures at the exchange sunk to a new six-and-a-half-year nadir below $1,640 per tonne. The effect of worsening aluminium and nickel prices pushed adjusted EBITDA at Glencores trading desk 27% lower during January-June, to $1.2bn.
With prices continuing to fall, not just in aluminium but all of the firms major materials markets, investors should expect further significant weakness across both Glencores industrial and marketing divisions.
Divestments undermine growth story
As well as striking-off the dividend, Glencore has also announced a variety of other measures to help slash its debt mountain to $27bn by the close of 2016. Such initiatives include a rights issue, further cost-reduction schemes, as well as a sale of some of the companys assets.
Again, I would deem such measures as prudent given the current landscape. But the proposed sale of projects like Glencores Cobar and Lomas Bayas copper mines in Chile does the firms long-term earnings picture no favours once commodity prices eventually recover. In my opinion the diversified digger faces too many obstacles at the current time to be considered a viable investment destination.
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