Glencore share price up, S&P downgrades outlook to negative

Ratings agency Standard and Poors cut its outlook for Glencore Plc to negative from stable after the London-listed company reported a hefty drop in first-half profit and lowered its projections for commodity prices.

The negative revision adds to pressure on the miner and commodity trader, whose shares have tumbled by about 65% over the past year. The company has lost a chunk of its market value over the past two weeks on concerns regarding its debt burden and a continued slide in commodity prices fueled by a challenging economic outlook in China. Shares of the company hit a fresh record low of GBX 121.80 on Wednesday and settled the day 8% lower, following a near 10% decline the previous day.

“These lower current and projected commodity prices are resulting in weaker than expected cash flow leverage metrics for global mining company Glencore, despite reducing gross and adjusted debt and the diversification of the group’s operations,” S&P analysts said. “The outlook revision reflects our forecast that Glencores credit measures will remain weaker than the ranges we see as commensurate with the current rating, even after factoring in some improvement in 2016 compared to 2015. We note that management is trying to strengthen Glencores credit profile, not least by focusing on continued debt reduction and cost efficiency.”

The company reported on August 19th that first-half earnings before significant items slid to $882 million from $2.01 billion a year earlier on the back of a 25% drop in revenue to $85.71 billion. Earnings before interest, tax, depreciation and amortization (EBITDA) plunged 29% to $4.61 billion.

However, Glencore kept its interim dividend unchanged from a year earlier at $0.06 per share and managed to lower its debt, which was welcomed by investors. It also cut its capital expenditure budget to $6 billion this year, compared to the previous guidance of $6.8 billion, and set a spending ceiling for next year of $5 billion “under current market conditions”.

Also on the positive side, S&P reaffirmed on Thursday its long-term corporate credit rating on Glencore at BBB and its short-term rating at A-2, which bears more importance for the company in terms of its cost of financing. Analysts believe that the London-listed company can meet its debt reduction target by reducing working capital and, if necessary, by cutting dividends. Glencore itself has expressed confidence that it has enough levers to reduce its debt burden and cope with the prospect of higher US interest rates.

Glencore Plc traded 4.64% higher at GBX 128.50 per share at 09:43 GMT in London, trimming its year-on-year drop to 65.07%. Shares of the company are down about 13% this week, following 11 consecutive weekly declines, leaving Glencore valued at £16.07 billion.