Investors have turned their backs onGlencore (LSE: GLEN) this year as theyve become increasingly concerned about the groups mounting debt pile.
These concernshave driven Glencores shares to a new low almost every month, and they reached a new all-time low this week. Year-to-date, Glencores market value has been cut in half.
Debt reduction
At the beginning of September, Glencores management decided totry and reassure investors about the sustainability of its debt pile by announcing a $10bn debt reduction package.
The package has been designed to reduce Glencores debt to managements targeted range of 3x earnings before interest, tax, amortization and depreciation.
As part of the companys debt reduction package, Glencore raised $2.5bn through a share placing earlier this week, issuing 1.3bn shares at a price of 125p. Glencores management purchased around $400m worth of the shares in the placing.
In addition to the cash raised from the placing, Glencore is planning to save $2.4bn by suspending its dividend and $1.5bn by selling down existing inventory. A further $500m to $1bn will be saved via reducedcapex, and the balance of the $10bn will be made up with asset sales.
But the question is, will this debt reduction package be enough?
Complex business
Glencore is an extremely complex business, even some of the Citys top analysts are unable to get to grips with the companys trading division. That said, the company does reveal its quarterly trading inventory figures, which are readily marketablecommodities Glencore counts these as cash. At the last count, Glencore had $17.7bn in readily marketable inventories and net debt amounted to around $29bn. Excludinginventories, debt exceeded $45bn.
But as a miner and leveraged trading house, Glencore is more exposed than most of its peers to the commodity market.
For example, analysts atMacquarie believe that the price of the three key commodities Glencore producers (coal, copper and nickel) would only have to increase by a total of 8% to rebalance the companys balance sheet. That said, if the price of these commodities fell 8%, Glencore could be forced into conducting anther share placing.
Still, as no one really understands how Glencores trading operations work, these are only ball-park figures.
Risks remain
Glencores trading operations require the company to borrow heavily. So, the company will always have a higher level of gearing than its comparable peers, most of which dont have atrading division.
With this being the case, the company certainly isnt suitable for all investors. A highly leveraged black-box commoditiestrading business with a coal and copper miner on the side is going to produce volatile returns.
So, if youre not comfortable with volatile returns and a high level of risk, a more defensive play suchUnilevermight be a better pick.For example, over the pastthree years Unilever has outperformed Glencore by approximately35% per annum including dividends.
Now, you may be thinking that I’ve just cherry picked Unilever because the company’sreturns are better than average, but that’s not the case.
Unilever has actually been picked by the Motley Fool’s top analystsas one of thetop five sharesyou should hold in your investment portfolio, due to the company’s defensive nature and hefty dividend payout.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares in Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.