Shares of Glencore plc: If you like 'em at $5 per share, you'll love 'em at $2.50. I think that statement holds, but there are plenty of caveats and qualifiers.
This column first mentioned Glencore plc on Aug. 20 as a possible aggressive value play. At the time, the miner-trader's ADRs had lost nearly half their value year to date and were trading at around $5.00.
Yesterday, they closed at $2.07, for a horrifying year-to-date loss of 76% (though the shares are rebounding somewhat today.)
While I would argue that decline is excessive and driven by sentiment rather than fact, just because a company's intrinsic value is generally much less volatile than its stock price does not mean it can't decline substantially over the course of a six weeks. Consider the value of Volkswagen AG today compared to a month ago, for example.
That's particularly true of a company that has a substantial trading operation: The confidence of your counterparties matters in the money-shuffling business.
Back in August, management understood that it had to address the market's loss of confidence forcefully; at the beginning of the month, the company announced a $10 billion program of measures to reduce its net debt by a third. One of them was a $2.5 billion equity capital raising (representing 10% of the company's existing equity) that was completed mid-month.
Manifestly, that hasn't been enough to prevent investors' loss of confidence from compounding, but sentiment may have bottomed yesterday (in the short term at least), as the market (over)reacted to an analyst note from Investec focused on the penalty that Glencore's debt load imposes on shareholders.
One of the authors, Hunter Hillcoat, said yesterday: "If commodity prices don't appreciate, where does that leave shareholders? At current spot prices, all else being the same, Glencore's equity value is zero."
However, it's worth pointing out that the analyst was referring to a scenario in which current spot prices become the norm; furthermore, he believes the shares offer value at their current price. I still do, too, but the risk of a permanent loss of capital has increased, and investors should expect plenty of volatility along the way.