Glencore’s shaky state unsettles resource funds

Added 5th October 2015

Mining and resource funds are coming under pressure after industry players assaulted Glencore’s share price on 28 September 2015.

Glencore’s shaky state unsettles resource funds

Early last week, investors worried about Glencore’s financials, fled from the stock - causing it to plummet 30%. Although the stock recovered slightly, industry sources still remain spooked by the sudden turn of events.

Nitin Dialdas, Mandarin’s Capital CIO, told Fund Selector Asia that he believes that “the commodity sector is having serious issues, with Glencore at the forefront of troubles”.

“The problem is that Glencore is highly geared and I am unsure that the company can actually meet its debt burden going forward. Whilst it may have enough for the immediate term, looking out over the next 12 to 24 months, I think there could be some trouble ahead,” Dialdas said.

Mining and resource funds exposed to Glencore include BlackRock GF World Mining, Baring Global Mining and JPM Natural Resources.

Performance sheets by FE Trustnet shows that BlackRock GF World Mining cut back its Glencore position last month from 7.97% to 5.64%. Baring Global Mining meanwhile has a 4.35% exposure to Glencore, while JPM Natural Resources still holds 4% of the stock.

"The problem is that Glencore is highly geared and I am unsure that the company can actually meet its debt burden going forward"

UK equity funds with Glencore in their top 10 holdings include Dimensional UK Value with 3.3% and SLI UK Equity Recovery with 3.5%, FE Analytics data shows.

“I would be very cautious trading the stock as the moment as I believe that there will be further pain ahead unless we see a sharp rebound in commodity prices and that is simply not going to happen anytime soon,” Dialdas said.

Jim McCaughan, CEO of Principal Global Investors, appears to have hit the nail on the head when he forecasted in late September  that "oil, metals, and soft commodities are all basically in plentiful supply, so it is too early to buy [into] the commodities or the equity of commodity producers".

Glencore disclosed last week that it is working on a suite of measures to reduce its debt levels by up to $10.2bn.

“Glencore has no debt covenants and continues to retain strong lines of credit and secure access to funding thanks to the long-term relationships we have with our banks,” the company said.

A snapshot of how mining and resource funds are performing:

*Source: FE Analytics

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