DBRS Confirms Glencore plc at BBB, Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Glencore plc (Glencore or the Company) at BBB with a Stable trend. The confirmation reflects Glencore’s solid business profile, particularly its large size, diversification and the cost-competitiveness of its operations. The Stable trend reflects the Company’s solid liquidity and good financial flexibility. DBRS notes that Glencore’s current credit metrics are weak, with most of key ratios remaining below DBRS’s investment-grade range. However, should the current low price environment persist, DBRS expects Glencore to take appropriate measures to minimize further weakening of its credit metrics with further capital expenditure (capex) reduction, and asset divestitures. The Company has planned to preserve capital and reduce debt with an aggregate value of up to $10.2 billion, including issuing up to $2.5 billion equity, cutting dividends, reducing working capital, and selling assets.

Glencore’s business profile remained solid. Glencore is one of the largest mining companies with long-life reserves and one of the largest commodity traders in the world. The size and scale of operations allow the Company to achieve a level of efficiency not attained by smaller companies. The Company’s product and geographic diversification significantly reduces the risk associated a single commodity and a single region. Glencore is a low-cost producer in key products such as zinc, nickel and copper, enabling it to cope with the low price environment better than higher-cost producers. In addition, Glencore’s marketing activities (24% of 2014 EBITDA) have produced more stable earnings than mining activities since it is less directly sensitive to prices than mining activities. However, the risk in marketing activities remains significant, largely reflecting: (1) significant liquidity requirements, (2) potential market exposure due to the mismatch of purchase contracts and sales contracts, (3) counterparty and performance risk and (4) potential price risk arising from timing differences between the purchase and sale of commodities.

DBRS notes that Glencore’s credit metrics weakened modestly in 2015 from 2014 due to low commodity prices (in mining activities) and tough metals’ trading conditions in marketing and trading activities. This situation is not expected to improve in the near term and should continue to pressure the H2 2015 credit metrics. However, the Company’s liquidity remained solid with over $3.0 billion in cash and over $7.0 billion in undrawn credit facilities while its long-term debt maturity profile is moderate. Based on Glencore’s revised capex reduction plan ($6.0 billion and $5.0 billion for 2015 and 2016, respectively, from $9.0 billion in 2014), the net free cash flow deficit for 2015 is expected to be significantly lower than 2014 and should be adequately financed with currently available liquidity.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Mining Industry, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.