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Glencore has responded to a sharp fall in its stock price following a subpoena from US regulators by announcing plans to repurchase up to $1bn of its shares.
The London-listed miner and commodity trader, run by billionaire Ivan Glasenberg, said the share buyback programme would commence immediately and run until the end of the year.
The buy-back will be a two stage process. Ahead of half year results in early August, Citigroup will buy £350m of shares on behalf of the company. After that, the repurchases will be undertaken in accordance with directions from Glencore.The company last announced a buyback in August 2014 when its shares were trading at 359p.
Analysts said the buyback signalled management’s confidence in its underlying business and the value of its shares.
“This serves to provide a message to the market that management sees value in the shares at current level, at a time where perceived external uncertainty is high, and where impact from the Department of Justice subpoena specifically is difficult to judge,” said Tyler Broda of RBC Capital Markets.
Shares in Glencore dropped to a 12-month low on Tuesday following news that it could be facing a wide-ranging US government investigation into bribery and corruption after federal prosecutors demanded details of its business dealings in some of the world’s most volatile countries.
Glencore has been ordered by the Department of Justice to hand over records related to its compliance with US money-laundering laws and the Foreign Corrupt Practices Act (FCPA). The subpoena covers Glencore’s operations in Nigeria, the Democratic Republic of Congo and Venezuela dating back to 2007.
Glencore’s share price has dropped 18 per cent this year, underperforming its peers that include Anglo American, BHP Billiton and Rio Tinto, as its has wrestled with a number of problems, chiefly in the Democratic Republic of Congo.
The central African nation is home to some of Glencore’s most important growth assets: large copper and cobalt mines. However, the prospects for those operations have been clouded by legal fights with Gécamines, the DRC’s state mining company, and also Dan Gertler, a former business partner who is under US sanctions. The DRC has also pushed through a new mining code, which will lead to increased royalties and taxes.
“Glencore shares are down 18 per cent year to date versus. peers up an average 5 to 6 per cent over the same period. This is despite the underlying commodity basket of Glencore remaining relatively resilient,” said Eugene King, Goldman Sachs analyst.
“Expectations of a buyback among investors we have spoken with had increased more recently as the shares had continued to underperform, however most had expected a buyback to be announced with the first-half results in August.”
While investors have been focused on Glencore’s problems in the DRC, and now the prospect of a DoJ investigation, its underlying business has been performing well.
Bankers said Glencore’s thermal coal business would be generating large profits at the moment with prices for the fossil fuel in Asia at a six-year high of about $115 a tonne.
In metals, strong global growth and supply constraints following years of under-investment by cash-strapped mining companies have created lucrative arbitrage opportunities for Glencore’s trading business.
The lowly valuation of Glencore and other miners is something that Mr Glasenberg has been keen to address this year. At conferences he has told investors the sector has “never been” cheaper compared with the wider market and new dividend and capital return policies would ensure they “receive a greater share of earnings” in the future.
“We expect a positive response to the additional capital return, which shows the success of Glencore’s completed balance sheet deleveraging programme,” said analysts at Numis Securities.
“However, the company faces significant regulatory and geopolitical noise with respect to the recent US DoJ subpoena, the new DRC mining code and several lawsuits in the DRC with regards to its operations in the country.”
Shares in Glencore were up 4 per cent at 332p on Thursday morning, the biggest riser in the FTSE 100.
Glencore’s turbulent four months
Joseph Kabila, president of the Democratic Republic of Congo, signs new DRC mining code into law
Gécamines, the DRC’s state-owned mining company, files legal action against Glencore
Israeli billionaire Dan Gertler files freezing orders against Glencore’s two mines in the DRC
Glencore and QIA abandon plans to sell Rosneft stake to CEFC
Shares fall on news that the UK’s Serious Fraud Office is looking at Glencore’s ties to Mr Gertler
Glencore writes off $5.6bn to end DRC dispute with Gécamines
Glencore settles legal dispute with Mr Gertler, making royalty payments to him in euros so as to not fall foul of US sanctions
Glencore subpoenaed by US Department of Justice