Here comes Glencore

It was expected to fetch a higher valuation, and it was expected to coincide with a continued fervor for all things commodity related, but Glencore’s move into public markets will still come with a hefty US$60 billion price tag on the king of metal traders.

And while that figure is less than the top price of US$70 billion it envisioned receiving, the IPO has been met with healthy demand as the offering was covered on the first day of a two-week book build.

Some onlookers have opined that the IPO was calculated by Glencore to cash in on the commodity cycle at its peak but a less cynical outlook would take notice of the shifting source of revenues for the company and the heavier capital requirements such a shift will demand.

A look at Glencore’s recently released prospectus shows a company that is moving towards generating more of its profits from mining and less from its traditional source of commodities trading.

Operating profits from its marketing business – which trades everything from soybeans to oil – was $2.4billion last year compared with $2 billion from mining and other industrial activities. But Citigroup, Morgan Stanley and several other members of the syndicate behind the IPO say that going forward the balance will tilt towards mining.

By 2012, Morgan Stanley expects the company to be generating $4 billion in operating profits from mining alone compared to $3.8 billion from trading. An additional $1.6 billion in profits is expected to come from its oil and agricultural assets.

Those numbers will also continue to be boosted by consolidated profits from its 34.5% stake in Xstrata, which amounted to $1.7 billion last year.

Such an emphasis on digging up rocks requires increased capex costs, and Glencore said as much when it outlined its intentions for the US$11 billion it expects to raise in capital in connection with the IPO.

Glencore says that US$5 billion of the new proceeds are earmarked for capital expenditure over the next three years while US$2.2 billion will go towards increasing its stake in miner Kazzinc – of which Glencore already owns 50.7% of.
The Swiss company currently has strong mining positions in Kazakhstan, the Democratic Republic of Congo and Colombia – not exactly the type of regions that corporations bothered by political risk would flock to.

But Glencore has a long history of successfully doing business where others fear to tread, even if that policy has landed it on the wrong side of the law.

Founded in 1974 as Marc Rich + Co, the company was renamed Glencore in 1994 after Rich sold his share to senior traders at the firm. Rich was then a wanted man in the U.S. after being convicted of tax evasion and illegally trading oil with Iran during the hostage crisis. Rich lived in Switzerland, unable to return to the U.S. until he was pardoned by Bill Clinton pardoned him at the end of his presidential term.

Part of the company’s current empire is made up of its 74% stake in Katanga Mining (KAT-T) which is on track to produce 300,000 tonnes of copper a year by 2015.

The deal to win that position in the copper miner exemplifies Glencore’s knack for making opportunistic, low-priced acquisitions.

In January 2008 Katanga merged with Nikanor, which held ground adjacent to Katanga’s in a deal that Glencore, an investor in both companies, helped to broker.

Shortly afterwards, however, Katanga was stung by the financial crisis and was only saved from insolvency by a $265 million convertible loan from Glencore – the conversion of that debt translated into Glencore’s current controlling interest.

Considering that Equinox Minerals (EQN-T), a company with less copper tonnes in the ground than Katanga, was valued at $7.6 billion in a takeover bid last month, the majority stake for Katanga for $265 million shows just how shrewd of a deal maker Glencore can be.

But going public company is expected to bring some challenges to a company whose corporate culture has thrived away from the scrutiny of regulators and a multitude of investors.

Helping to ease the transition, however, will be a windfall of cash to some of the senior traders who currently own the company. Glencore’s chief executive Ivan Glasenberg has a 15% stake in the company which will likely be worth US$9.6 billion. At least four others at Glencore will also become billionaires via the transaction.

None of the group of current owners, however, will be able to sell shares for the first five years of public trading.
As part of its plan to IPO the company also announced it has appointed Simon Murray as its non-executive chairman.
Murray is currently the executive chairman of General Enterprise Management Services International and former managing director of Hutchison Whampoa. He is also a former French Foreign Legionnaire

The newly-appointed chairman wasted little time in generating controversy for a company known to shy away from media attention.

“Why tell everybody you’ve got to have X number of women in the boardroom?” Murray told The Telegraph. “Women are quite as intelligent as men. They have a tendency not to be so involved quite often and they’re not so ambitious in business as men because they’ve better things to do. Quite often they like bringing up their children and all sorts of other things.”

“All these things have unintended consequences. Pregnant ladies have nine months off. Do you think that means that when I rush out, what I’m absolutely desperate to have is young women who are about to get married in my company, and that I really need them on board because I know they’re going to get pregnant and they’re going to go off for nine months?”

Five other non-executive director positions were announced as well, one of whom, Peter Coates, is connected to Glencore’s current management as he recently served as chairman of Minara Resources, which is majority owned by Glencore.

Best practices in corporate governance call for a majority of the board members to be independent from management.

The most recognizable name on the board is Tony Hayward, who made plenty of headlines when he was the head of BP (BP-L) during the Horizon oil spill of 2010.