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Glencore cuts more production as debt falls

Published: 11:01 04 Nov 2015 GMT

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Hard hats at the ready: despite the recent rally, the shares are this year's worst performers in the Footsie

The market has reacted positively to commodities titan Glencore's (LON:GLEN) update on its debt reduction programme.

The group expects net debt to be down to around US$25bn by the end of this year and is seeking to reduce net debt to somewhere a little above the US$20bn by the end of 2016.

Glencore said it is also targeting net funding of around US$40bn by the end of this year, down some 15-20% from the end-June level.

The indebted Footsie colossus reiterated 2015 full-year adjusted underlying earnings (EBIT) guidance of US$2.5bn to US$2.8bn and revealed that marketing over the third quarter had been stronger, with improved contributions from metals & minerals and agricultural products.

Glencore said the shut-down and restart plans for the Katanga and Mopani copper assets have been completed; a phased restart and ramp-up is planned for Katanga in the first half of 2017, while at Mopani the smelt will continue to operate either at reduced levels or in spells to satisfy long-term third party concentrate purchase contracts.

Glencore has deferred investment in the new concentrator at Mopani to 2017, and full production will be resumed in 2018 upon completion of this project.

Glencore had indicated in early September that these changes would reduce production by around 400,000 tonnes of copper over 18 months compared to previous plans, but the projected reduction has been amended to 455,000 tonnes.

To preserve the value of Glencore's reserves in an environment of low zinc and lead prices, 500,000 tonnes a year of mined zinc and 100,000 tonnes a year of mined lead production have been curtailed until such time that prices return to sustainably higher levels.

Russ Mould, investment director at AJ Bell, said the market took a shine to the shares, up 5.4% at 125.75p in late morning trading, as Glencore offered further reassurance on its debt pile and reaffirmed its plans to cut production in key areas such as zinc and copper.

“The output cuts should help to restore better balance between supply and demand in the zinc, copper and ferrochrome markets, although the risk remains that demand continues to sag if China slows down.

“For all of Glencore's plans to help those glutted markets, the prices of copper and zinc have not made any net gains since the company first announced its production cuts in September and October,” Mould noted, adding that Glencore's share price tends to track the Bloomberg Commodity index, so a sustained rise may be needed to give real long-term support to the shares.

“Glencore is likely to remain a volatile and high-risk stock, especially as its debts remain substantial despite recent welcome reductions in its liabilities,” Mould suggested.

The group announced it has entered into a long-term streaming agreement with Silver Wheaton for delivery of silver calculated by reference to silver produced at the Antamina mine, located in Peru.

This transaction will play its part in reducing Glencore's debt, with Silver Wheaton making an advance payment of US$900mln to Glencore five business days after the transaction has closed – probably before the end of this month, Glencore ventured.

In return, Glencore will deliver silver to Silver Wheaton equivalent to 33.75% of silver produced by the Antamina mine at a 100% payable rate. After 140 million ounces of silver have been delivered under the streaming agreement, the stream will be reduced to the equivalent of 22.50% (corresponding to two-thirds of Glencore's ownership interest in Antamina) of silver produced by the Antamina mine.  

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