Analysts battle over outlook for Glencore

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By Eric Onstad

LONDON, Sept 29 (Reuters) - A battle between supporters and detractors of Glencore (Xetra: A1JAGV - news) in the analyst community has intensified amid the sharp gyrations in the commodity group's share price.

Glencore's shares tumbled about 30 percent on Tuesday in a move attributed to investor panic after the release of a research note by Anglo-South African investment bank Investec which included the phrase "Bermuda Triangle" in its title.

The share price then rebounded by 20 percent after the Swiss-based trader and miner said it was strong enough to ride out current volatility in commodity markets.

Research by the opposing camps differs so radically on the outlook for the commodity group, whose share price has fallen by about three quarters since the start of the year, that they could almost be describing two separate companies.

Those who are negative about Glencore focus on its heavy debt burden of $30 billion and hold out the prospect that commodity prices could decline further or remain stuck at low levels due to a slowdown in China, the world's biggest buyer of raw materials.

The Investec note said all the equity value in Glencore (Amsterdam: GX8.AS - news) could evaporate if commodity prices remained at their current multi-year lows.

Another prominent bear, Goldman Sachs (NYSE: GS-PB - news) , said last week in a note that Glencore had failed to do enough to reassure investors about cutting its debt pile.

Earlier this month, Glencore announced plans to suspend its dividend, sell assets and raise cash to help cut its net debt by a third by the end of 2016. The group has already raised $2.5 billion through a share placement.

Despite such measures, U.S (Other OTC: UBGXF - news) . investment bank Jefferies warned in a note on Tuesday that there was a real risk of Glencore's credit rating being downgraded to non-investment grade if commodity prices fell by another 10 percent.

"The company should aggressively act now to reduce this downside rail risk or its share price free fall could have further to go," a note said.

HEALTHY CASH FLOW

But Glencore has strong supporters too.

Citi said on Tuesday a downgrade by credit agencies was unlikely since the group had $12 billion in liquidity and it urged investors to buy with a potential return of 120 percent.

Swiss bank UBS (NYSEArca: FBGX - news) was even more bullish, expecting shares to shoot up by more than threefold within a year.

"The share has been heavily oversold ... We expect the share to re-rate over 6-12 months as management delivers on promises to cut net debt," it said.

The supporters argue that, even with low commodity prices, Glencore is still generating healthy free cash flow.

Bernstein has an "outperform" rating and a price target of 450 pence, a potential gain of 430 percent.

Even (Taiwan OTC: 6436.TWO - news) in the worst case scenario, with commodity prices never recovering from their current depressed state, there is still 93 pence of value, Bernstein said.

After outlining the bear case, the Bernstein note added: "All of this is, to say the least, less than staggering in its intellectual profundity." (Editing by Gareth Jones)