Glencore profit jumps on higher commodity prices

By Julie Crust and Quentin Webb

LONDON (Reuters) – Glencore (GLEN.UL: Quote, Profile, Research), the world’s largest commodity trader, posted a jump in 2010 profit and promised a robust 2011, strengthening its hand for a possible stock market listing that could value it at about $60 billion.

Net profit at the privately held trading, mining and resource investment conglomerate rose 40 percent to $3.8 billion, boosted by higher prices for metals and agricultural products, while revenue rose 36 percent to $145 billion.

Glencore told investors on a conference call on Thursday that it expected a strong 2011, with a very robust performance helped by organic growth, continued demand recovery and higher prices, a market source on the call told Reuters.

Company executives spent two days in London this week telling analysts about its business ahead of what could be Britain’s biggest initial public offering (IPO) this year.

Glencore told investors that no decision had been taken over a possible share offer and it did not want to commit to a timeframe for making a decision. It said it was considering many different capital structures, including an IPO.

Sources familiar with privately held Glencore’s plans have said it could float 20 percent or more of its stock, possibly split between London and Hong Kong, raising up to $16 billion.

“These strong results will benefit any theoretical or public value of the currently private Swiss group,” said Miriam Hehir, director of credit research at RBC Capital Markets.

A $60 billion valuation put on it by one analyst would make Glencore about the same size as Barclays Bank, T-Mobile owner Deutsche Telekom and U.S. carmaker Ford.

“I suppose the consensus valuation at the moment is probably $50 to $60 billion. But as every quarter passes by and metal prices keep going up, the mark-to-market value of those industrial holdings are shooting up,” said Henri Alexaline, credit analyst at BNP Paribas.

“This range could pretty easily move to $60-$70 billion or $60-$80 billion in terms of valuation,” he said.

Estimates of the group’s value have been scarce due to the unique combination of businesses, making it difficult for analysts to assess its worth.

Hehir said a $60 billion estimate could be somewhat conservative, given typical sector multiples and core profit of $6.2 billion last year.

“Glencore’s production growth initiatives, primarily in coal, copper, gold and oil, could progressively enhance its industrial income going forwards,” she said.

The company, owned by its 500-odd senior traders and other partners, said nothing new about any plans relating to miner Xstrata (XTA.L: Quote, Profile, Research), in which Glencore is the biggest shareholder, in a report earlier released to bondholders.

Speculation continues about a merger with Xstrata, though major Xstrata investors have said they are wary of a link-up ahead of an IPO due to valuation difficulties.

“We see a combination of Glencore and Xstrata as attractive, and while this could be achieved without Glencore listing, many Xstrata shareholders may prefer to see an external valuation of Glencore ahead of any potential combination,” said Hehir.

Glencore’s biggest earnings contribution came from its industrial assets, where earnings before interest and tax surged 72 percent on stronger metals prices and improving market sentiment in industries such as automotives and construction.

Glencore owns or partially owns mines, refineries, smelters and grain silos around the world. These industrial assets accounted for 56 percent of the group’s earnings for the year.

Its biggest single investment is its 34 percent stake in Xstrata, worth about 14 billion pounds ($23 billion).

Glencore also trades a wide range of commodities and raw materials from its own projects as well as from third-party producers. Earnings from these activities rose 47 percent.


Core earnings from producing and trading metals and agricultural products more than doubled last year at Glencore, according to the group’s full annual report obtained by Reuters. The company only makes a short summary of its results public.

Glencore touted a “very healthy” return on the notional equity employed in its marketing operations, which transport metals, oils and grains around the globe.

By commodity type, the report said adjusted earnings before interest, tax, depreciation and amortization (EBITDA) leapt 108 percent to $3.3 billion in metals and mining, and 101 percent to $766 million in agricultural products.

However, a steady oil price and weak freight markets resulted in a 41-percent drop in its energy segment.

Net debt increased to $14.8 billion from $10.2 billion a year earlier, but fell $400 million from the third quarter.

Strong commodity prices, led by demand from key consumer China, have resulted in healthy profits for many miners.

“We’re going back really to the peak earnings level we had in 2006 and 2007,” said Alexaline. “It’s great timing ahead of the IPO, with very supportive trends.”

The conglomerate nature of Glencore’s operations means it has no direct rivals and makes comparisons tricky. It is also difficult to measure Glencore’s success last year with its performance in the last commodities boom.

“Glencore’s business is much larger and has a higher exposure to industrial activities than was the case in past commodity cycles,” Hehir said.

The company told investors that a restructuring of its Kazzinc gold unit was continuing. It said a spin-off was not possible before the third quarter and it could retain the business as a commodity hedge.

Glencore unveiled plans in August for a spin-off of the gold assets owned by its Kazzinc unit, possibly via a listing, during the course of 2011. A source said at the time the unit could be worth over $5 billion.

Glencore could not be reached for comment on the content of its conference call.

(Additional reporting by Eric Onstad and Paul Hoskins; Editing by Andrew Callus and Will Waterman)

($1=.6124 pounds)