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Glencore’s earnings are buoyant while it’s shares flounder – there’s a reason

Glencore is a barometer of the world economy – which doesn’t bode well for the commodities group

Here’s a question: why did Glencore’s share price close almost flat despite the company reporting double-digit earnings and revenue growth in the first half of the year?

The short answer is the market saw through the hype about opportunities for mergers and acquisitions to focus on underlying trading, and it didn’t like what it saw.

Earnings before exceptionals in both the mining and marketing divisions fell 12% and 15% respectively in the final quarter. Commodity prices have come off the boil since January as worries grow that the world could be heading for another slump, and Glencore has been caught in that downward spiral. The shares are trading at around 25% below the May IPO price, when we warned the company was coming to the market on a very rich valuation. Shame on all the fund managers who piled into the stock, and who now find they are sitting on a paper loss.

Glencore’s business model is a lot harder to understand than that of conventional miners because it owns a huge marketing operation, which buys from third parties and sells on to customers across five continents. But ignorance is no excuse and shareholders have only got themselves to blame for not holding out for a lower float price prior to the listing.

Given Glencore’s latest performance, the argument that it should be rated more highly than pure miners such as BHP simple doesn’t hold water. If anything, the shares should trade at a significant discount to reflect the complexity of its operations.

As for the future, chief executive Ivan Glasenberg tells us he is optimistic about long-term economic prospects, while in the short term, commodity prices should “sustain current levels”. He hints at more bid action to come on top of his attempt to buy out Australia’s Minara Resources. Optimum Coal of South Africa could be next in the firing line.

But if Glencore is a barometer for the world economy, as many now contend, its financial results are hardly reassuring. And with mounting evidence of Chinese destocking, and storm clouds gathering in the eurozone and US, expect the shares to tread water, at best. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds