Saying that it has been a tough year forGlencore (LSE: GLEN) would be an understatement.
Year to date, Glencores shares have fallen 62%, and the 13bn FTSE 100 company now trades like a penny stock.
And unfortunately, its almost impossible to put a value on Glencores shares right now.
Even the Citys top analysts are finding it difficult to get to grips with the figures. The simple fact of the matter is, few understand what goes on at Glencores trading division.
Its this division thats responsible for Glencores troubles and uncertainty surrounding the business.
Trading black box
Glencores trading arm is a huge force in the commodity world.Ahead of its 2011 initial public offering, Glencore disclosed that it controlled 60% of the worlds zinc, 50% of copper and 45% of lead markets. Also, the group has the worlds largest oil tanker fleet under management.
But to operate effectively, Glencores trading armborrows heavily to boost returns similar to the way City traders use short-term financing to improve returns on the trading floor. Glencore has $18bn in short-term loans outstanding, which it is using to fund its trading operations.
According to Glencores management, these short-term loans shouldnt be a problem for the company as they backed by raw materials that can be sold right away.
So, in theory, the short-term debt isnt an issue for the company, but what is a problem is Glencores reputation. You see, Glencores traders have a reputation for being extremely aggressive and taking on plenty of risk to drive returns, a strategy that works well in a bull market, but not so well when commodity prices are falling.
As a result of Glencores aggressivenature, analysts are now asking if the company has taken on more risk than it should have done.
Moreover, theres a feeling that the company could be hiding something from investors. Along with its reputation for aggressive trading, Glencore also has a reputation for being extremely secretive.
Binary bet
Glencorestrading arm earned $1.1bn during the first-half of 2015, around 76% ofthe companys total earnings. So, in many respects the group is highly reliant on the success or failure of the trading division.
However, due to the black box nature of Glencores trading arm, its impossible to accurately value the company.
For example, analysts at Morgan Stanley believe that Glencores shares could rally to 217p within six months if commodity prices improve. If not, Glencores shares could fall to 17p. Analysts atInvestec note that if commodity prices remain at present levels for an extended period, Glencores shares could fall to zero over the long term. Although, once again this thesis is invalid if prices recover.
And lastly, Goldman Sachs believes that if commodity prices fall another 5% on average, Glencore could lose access to the short-term funding needed to sustain its trading operations. Again,this thesis is invalid if prices recover.
Many different views
With so many different opinions floating around, it’s now more important than ever for investors to do their own research on Glencore before making a trading decision. You need to be comfortable with the company, and level of risk involved before buying in.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.