Risky business

Glencore's risk-taking culture dies hard

Glencore is a risk-taker in a risk-averse market. Fragile confidence in the world's third-largest mining and trading group wasn't helped by a $395 million coal-hedging loss that was revealed in its latest first-half results. The subsequent fall in the company's share price shows Chief Executive Ivan Glasenberg is caught between finding growth and delivering financial security.

Originally a trading business, Glencore is unique amongst the big three mining giants. Big competitors such as BHP Billiton and Rio Tinto don't hedge future coal production because their investors actively want exposure to commodities prices. Glencore, by contrast, took out a hedge earlier this year against 55 million tonnes of future coal production, which has soured because the price of coal has increased. Newcastle thermal coal futures have gained 38 per cent to $65 per tonne since the beginning of April. The resulting hit helped push Glencore to a first-half net loss.

Fortunately, that's a paper loss rather than a cash cost, so the bigger story for Glencore, reducing its borrowings, is still on track. Since it was forced on September 7 into a painful $10.2 billion plan to reduce its debt, the shares have risen, more than doubling in 2016 so far. Costs have been cut, and assets sold. That prudence, which included roughly halving its capital expenditure in the first six months, has mostly paid off and Glasenberg feels confident he can get debt down to between $16.5 billion and $17.5 billion by the end of the year.

Being stable, and less indebted, is a good thing but comes at the cost of slower growth. Expansionary capital expenditure has shrunk by around two-thirds in the past year. It can't be much fun for an aggressive trader like Glasenberg to rein in his animal spirits, but that's what investors demand.