Image source:
What's going on?
Glencore, the massive mining and commodity trading firm, reported its 2015 results on Tuesday and, while it wasnt pretty, the bad news was expected: it lost $5 billion. The good news is that Glencores CEO thinks that commodity prices have already bottomed and Glencores stock price is starting to reflect that.
What does this mean?
As we reported at the time, Glencores stock got crushed towards the end of last year as prices for commodities, like copper and iron ore, sold off sharply. Glencore had a lot of debt and that exacerbated the downward spiral of its stock price. However, late last year it announced plans to sell some of the businesses it owns and, consequently, to significantly reduce its debt burden. In the eyes of many investors, that made it much less likely that Glencore would go bankrupt. Moreover, the recent rebound in commodity prices (like iron ore) has helped the stock gain 75% from its early January low!
Why should I care?
The bigger picture: Commodity prices are rebounding and miners are benefitting. Global mining stocks are, on average, up this year while stocks overall remain down for the year. One reason for this is probably because Chinese banks have started lending more money to companies in China and those companies are buying commodities to do things like build factories and infrastructure (like roads and railways).
For the stock: Glencore, likely, remains heavily tied to Chinese demand and, relatedly, commodity prices. Glencore has two businesses: 1) its a miner who digs up the commodities and sells them, and 2) a trader who, in theory, can profit no matter which way commodity prices are going. While the trading business still managed to make a decent profit in 2015, the actions of the share price suggested that Glencore is much more tied to commodity prices than some had expected (in theory, the trading business was supposed to cushion any commodity price fall). While a safer company because it has reduced its debt, its likely that Glencores fortunes will still be closely tied to the price of commodities.
Originally posted as part of the Finimize daily email.
The top 2 financial news stories in 3 minutes. Join over one million Finimizers
