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Market disturbances challenges Glencore and Baar

Market disturbances challenge Glencore nickel production. Baar already reduced production of copper, zinc and coal.

As much as 70 per cent of global nickel output is unprofitable, the chief executive officer Glencore says, amid calls to slash production.

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Ivan Glasenberg said that in 2013, the biggest nickel producers “really screwed up” by expanding too fast.

The Baar, Switzerland-based company has already cut output in copper, zinc and coal.

In Sudbury, Glencore operates the Nickel Rim and Fraser mines, a mill and a smelter and employs about 1,200 people.

“People are bleeding cash, and when I say bleeding, it’s big cash,” Bloomberg News reported Glasenberg as saying, adding that as much as 70 per cent of global nickel output is unprofitable.

“We don’t understand why people don’t react in the same manner as we do. Big mining companies, other mining companies keep operations open, praying for better prices.”

Nickel has plunged 44 per cent this year, the worst performing main contract on the London Metal Exchange. Prices touched the lowest since June 2003 last month. On Monday, the price hovered below US$4 a pound.

The nickel market “seems to be very, very depressed relative to the cost curve,” Evy Hambro, manager of BlackRock’s $3.1 billion World Mining Fund, said on a conference call last week held by Glencore Plc.

BlackRock is Glencore’s fourth-biggest shareholder, Bloomberg said.

“How much longer do you think we’re going to see some of this production remain around before it’s forced to be taken out of the market?” Bloomberg reported Hambro as saying.

Bloomberg said Hambro’s question underlines investors’ growing frustration with miners’ reluctance to close unprofitable operations.

While Societe Generale SA earlier this month forecast the nickel market to be in deficit in both 2016 and 2017, years of excess production has expanded stockpiles, the news agency said. Inventories reached a record of about 900,000 tons, equal to almost six months of global demand, Macquarie Group Ltd. estimated last month.

According to Bloomberg, Glencore said it controls two nickel operations that don’t make money at current prices. Glasenberg said on the call that the Murrin Murrin mine in Australia was unprofitable and may be closed and that its recently built Koniambo mine in New Caledonia was a “difficult” one. Glencore inherited the project through its 2013 acquisition of Xstrata Plc.

While Glendora and Vale have not made any moves to cut workers in Sudbury, smaller mining companies have not been so lucky. First Nickel closed its Lockerby Mine earlier this year, and KGHM put its McCreedy West Mine on care and maintenance. Both companies blamed low nickel prices for the moves.

Glencore, meanwhile, has increased its debt reduction target and deepened its capital spending cuts, stepping up its response to lower commodity prices and boosting its battered shares.

The mining and trading company said it was targeting net debt of $18 billion to $19 billion by the end of 2016, against a previous target of $20 billion.

Glasenberg had to bow to shareholder pressure in September by agreeing to cut Glencore’s debts and protect its credit rating.

The London-listed company’s net debt peaked at around $30 billion, one of the highest in the industry, and prices for its key products copper and coal have been languishing at multi-year lows.

After being spurred into action less than three months ago, Glasenberg said last week the company had accelerated its debt cutting after commodity prices tumbled further.

Glencore’s debt-reduction plan involves asset sales, reducing capital expenditure, suspending dividend payments and raising $2.5 billion of new equity capital.

The price of copper has since fallen nearly 11 per cent and hit a six-year low of $4,443.50 a tonne on Nov. 23.

Glencore had previously said the plan would allow it to withstand copper prices of $4,000 a tonne. A source close to the company said the revised plan would help Glencore cope with copper at below $4,000 a tonne, even at $3,500 a tonne.

Glasenberg said the company had already cut debt by $8.7 billion and was well placed to continue to be cash generative in the current environment, and at even lower commodity prices.

Swiss-based Glencore cut its capital expenditure for 2015 to $5.7 billion from $6 billion.

Spending is seen falling to $3.8 billion in 2016 from a previous estimate of $5 billion.

“In the current price environment the company will need to show continual delivery against this plan but this update is better than expected, sufficiently detailed and provides a clear debt reduction pathway and timeline,” Credit Suisse analysts said in a note.

Glencore makes about a quarter of its earnings from commodities trading, which had previously allowed it to withstand a steep fall in oil and metal prices slightly better than pure-play miners.

The trading division will generate adjusted earnings of $2.5 billion in 2015, against previous guidance of $2.5 billion to $2.6 billion.

It set guidance of $2.4 billion to $2.7 billion for the division’s earnings in 2016, reflecting lower working capital and reduced copper, zinc, lead and coal volumes.

Glencore estimated group core earnings or EBITDA of $7.7 billion in 2016 at current prices. sunmedia.ca

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