Citigroup and Bernstein still see value in Glencore

LONDON (ShareCast) - (ShareCast News) - Commodity trader Glencore (Xetra: A1JAGV - news) took a beating on Monday, falling to its lowest level since its IPO in 2011, after Investec (LSE: INVP.L - news) said the company's equity value is zero at current spot prices, but two analysts came out in its defence on Tuesday. Citigroup (NYSE: C - news) and Bernstein both said the market had exaggerated concerns about Glencore's financial health.

Citi, which rates the stock at 'buy', said the market's response to concerns around balance sheet and liquidity, as seen through the sharp drop in the shares and rise in CDS spreads, is overdone.

"We think that Glencore will promptly execute a streaming deal and/or a stake sale in agriculture business as outlined at original announcement which would be both credit and equity positive," it said. .

The bank added that the group is not limited to just selling a minority stake and if needs be, the entire agricultural marketing business could be sold, which it values at around $10.5bn.

In addition, Citi said that if the shares suffer further losses, management should take the company private, "whereby restructuring measures can be taken easily and quickly, with a potential float of just the industrial business occurring further down the track".

Citi said it doesn't see a stressed balance sheet. "The group has more than $12bn in liquidity, including $6.5bn of cash after the recent equity placing, implying that the group can stay away from debt markets till 2017 and potentially beyond if it could divest more than the $2bn target." It (Other OTC: ITGL - news) argued that even with copper at $4,000 a metric ton and other raw materials at spot prices, Glencore would post earnings before interest, taxes and amortisation of around $7.5bn.

Meanwhile, Bernstein, which rates the stock at 'outperform', argued that there is genuine economic value to be found in both Glencore's commodity trading business and its industrial metals and mining business.

"Even (Taiwan OTC: 6436.TWO - news) if we assume that the industrial assets continue to produce spot EBITDA margins (at spot commodity prices which are particularly depressed at present, with margins of only around 15%), and no contribution from the marketing business, we still see 93p of value. And this assumes that commodity prices never recover from their currently depressed state!"