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As Glencore cuts debt, is it a 'buy'?

Tanzeel Akhtar, special to
Ian Waldie | Bloomberg | Getty Images

Investors on Wednesday welcomed Glencore's plans to cut debt by selling assets, sending shares in the commodity trader sharply higher, but analysts caution that the stock will remain volatile for some time to come.

As commodity prices come under pressure, Glencore has announced it plans to cut debt by a third by the end of 2016.

The group also expects to cut its production of copper, its main earnings driver, by 455,000 tons by the end of 2017 in response to weaker demand.

Three month copper prices on the London Metal Exchange are currently hovering around $5,149 per ton, after hitting a six-year low in August.

Shares in the group have been hugely volatile, hitting an all-time low in September of 68.62 pence; on Wednesday the stock was up to 128 pence.

Russ Mould, investment director at AJ Bell believes Glencore is likely to remain a high-risk stock. He warns its debts remained substantial despite the recent reduction in its liabilities.

"The market took a shine to shares in commodity trader and producer Glencore today as it offered further reassurance on its debt pile and reaffirmed its plans to cut production in key areas such as zinc and copper," Mould said.

Paul Gait, senior research analyst of metals and mining at Sanford Bernstein told CNBC Glencore had taken into account people's concerns about the level of financial gearing on balance sheets.

"Glencore has been hit hard but so has Quantum and so has Anglo American," he said. "The people who have outperformed in that context are Rio Tinto and Antofagasta, with much lower levels of gearing on the balance sheets."

Simon Gergel, chief investment officer at Allianz Global Investor said Antofagasta offered a good buying opportunity.

"Antofagasta shares are quite depressed so there is a good opportunity we think to get involved there," Gergel, who has bought Antofagasta in the last six months, said.

Analysts at Deutsche Bank meanwhile kept their 'hold' recommendation on Glencore shares.

"Ironically, while the focus of the market will be on the liquidity numbers, the production report itself was strong," the brokerage said.

- By Tanzeel Akhtar, follow her on Twitter @Tanzeel_Akhtar