Glencore's (LON:GLEN) efforts to restructure its finances and slash debt still may not have been enough to make it a viable investment, reckons City broker Investec.
It says the benefits of the recently announced package may not feed through to investors unless commodity prices recover rapidly.
It has upgraded the share but only to 'hold' from 'sell' despite yesterday's sell-off, which saw Glencore shares drop 10%.
Last week the commodities and trading giant placed just over 1.3bn new shares at 125p per share to raise £1.6bn and shore up its balance sheet. Earlier this month it said US$1.6bn was to be saved by scrapping this year’s final dividend as it unveiled a massive US$10.2bn round of measures to preserve cash and reduce debt.
The suspension of next year’s interim dividend is expected to save another US$800mln, while planned asset sales should secure a further US$2bn, and between US$500mln and US$1bn would be cut from capex budgets up to the end of 2016.
Investec analyst Marc Elliott today said that the share placing and dividend cuts would yield US$4.9bn and buy management some breathing space.
"However, unless commodity prices recover rapidly from current depressed levels, the restructuring package may still prove insufficient for the benefits of recovery to feed through to equity holders, even with the additional US$5.3bn targeted," he said in a note.
The analyst reckons the additional US$5.3bn, if delivered, will be enough for Glencore to remain a going concern by the end of next year even if "today’s challenging macro environment persists".
"However, shareholder returns may well be minimal, with our analysis suggesting negligible earnings at spot commodity prices.
"If the upturn doesn’t come in 2016, then further dividend cuts and asset restructurings appear likely," he added.
Global economic worries and notably fears over Chinese growth have obviously taken their toll on commodity prices and the consensus is the pressure will persist for the rest of the year, though US broker Citi has suggested a weak recovery in the fourth quarter.
For example, yesterday fears over manufacturing saw copper futures fall 3.8% - the biggest decline in eight months. Coal and iron ore prices also continue to lie in the doldrums.
It's been a rocky road for Glencore in recent years to say the least since the float and mega-merger in 2012 with mining group Xstrata.
Glencore shares have been the worst performer on the FTSE 100 this year and the group has shed more than three-quarters of its value since it listed in 2011 and are down by two-thirds since it made an early stage merger approach to Rio Tinto (LON:RIO) in July 2014.
After floating at 530p in 2011, Glencore closed yesterday at 106.35p.
"Glencore remains the mining major most geared to a recovery in commodity prices. For investors anticipating the bottom will be seen in the next six-12months, the current price level could prove an attractive entry point, but the downside risks also remain high," said Investec.