Futures & Commodities

Glencore shares soar on fightback plans

Glencore shares soar on fightback plans

Shares in mining and commodities trading giant Glencore soared more than 12 percent at one point on Monday after the group unveiled plans to cut its debt by about $10 billion in response to a brutal sell-off in raw materials.

In a statement, the London-listed firm, said it would issue up to $2.5 billion of new shares, cut dividends, sell assets and look to sell a stake in its agricultural unit.

In addition, Glencore said it would suspend production at its copper operations in the Democratic Republic of Congo and Zambia. It said that suspending production for 18 months would remove about 400,000 tons of copper off the market.

Investors reacted positively to the news, sending Glencore shares rocketing, before paring some gains to close up around 7 percent at £131.80 ($201.44).

On the London Metal Exchange, copper prices rose after the news, before paring some gains to trade at $5145.50 a ton.

"The announcement that they are going to cut copper production will help tighten the market for copper, which is one of Glencore's most important markets," Paul Gait, senior research analyst for metals and mining at Sanford Bernstein told CNBC.

"The second aspect is that a lot of these concerns were already discounted in the stock," he said. "So what this decision does is unwind some of the more extreme concerns floating out there around Glencore's balance sheet."

Fabrice Coffrini | AFP| Getty Images

Bank of America Merrill Lynch upgraded the company's rating to neutral following the plan's unveiling.

"Unlike other management teams in the sector, Glencore has acknowledged its debt problem and is taking steps to address it," BoAML said in a note.

"We think the plan goes some way to addressing some of our concerns on Glencore's financing, we do still have a question mark on Chinese demand and hence (only) an upgrade to Neutral. Even after the reductions, the company will still be quite highly geared," the note said.

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Glencore¸ which is based in Switzerland, has been hit hard by a rout in commodity markets and the slowdown in China's economy, the second biggest in the world. Prices of copper, a key product for Glencore, hit a six-year low last month.

The firm's share price has slid some 54 percent so far this year and in August, the company unveiled a first-half loss of $676 million.

Against this backdrop, credit rating agency Standard & Poor's last week cut the global miner's rating outlook to negative.

The package of measures outlined on Monday will reduce Glencore's net debt to around $20 billion from around $30 billion, Glencore said.

"The measures we have announced today do not affect our core business activities and overall franchise value," Glencore CEO Ivan Glasenberg and CFO Steven Kalmin said in a statement.

"(They) have been designed to sensibly accelerate the deleveraging of our balance sheet, maximise future cash flow generation in the current weak commodity price environment and substantially improve our financial and credit metrics, stability and strength, in the event of a prolonged weaker pricing environment," they added.

Gait at Sanford Bernstein described the measures as "pre-emptive."

"We see more value in the stock than is discounted in the current spot price," he said. "The spot price for Glencore reflects the spot price for copper and both of those are at extremely suppressed levels."