Mining Giant Glencore's Share Woes Hurt Us All

It (Other OTC: ITGL - news) is a company of which many Britons may not even have heard - and yet Glencore (Xetra: A1JAGV - news) touches the daily lives of every woman, man and child in the country.

As one (Other OTC: IUSDF - news) of the world's biggest mining companies, the products it digs from the ground - copper, coal, iron ore, zinc - help build and heat the buildings we live and work in and the cars we drive.

As one of the world's largest commodity trading firms, if not the largest, it also ships those products around the globe and helps set the price of them.

Moreover, since May 2011, as a member of the FTSE-100, its shares are owned indirectly by millions of us through our pensions, ISAs and life policies.

It is this latest factor that has caused disquiet.

Shares (Berlin: DI6.BE - news) in Glencore, which were floated on the London stock market at 530p, crumbled on Monday to as low as 67p - a shocking fall of 87%.

It meant that more than $52bn worth of shareholder value went up in smoke, although on Tuesday the share price recovered some losses, closing up almost 17% to 80p.

Monday's fall was sparked by a note from analysts at the stockbroker, Investec (LSE: INVP.L - news) , suggesting that, should commodity prices remain at their present level, shares in Glencore could be rendered worthless.

The irony is that Glencore did not really want to float on the stock market in the first place.

Always one of the most secretive companies on the planet, its owners - the people who worked for it and in many cases still do - decided they needed to raise more capital following the financial crisis, which had affected the strong credit rating Glencore's trading division required to do business effectively.

The case made to investors was persuasive: if commodity prices rose, Glencore's mining operations would enjoy a rise in profits.

If commodity prices fell, Glencore's trading arm would profit on the downside, meaning that shareholders would benefit from movements in either direction.

Armed with fresh acquisition currency, in the form of money raised from investors and in shares on which a value could properly be placed following the flotation, Glencore in early 2013 snapped up Xstrata, a mining giant that was once part of the same company, for $30billion.

As China's seemingly-insatiable appetite for metals waned, though, it quickly became apparent that Glencore had overpaid for Xstrata.

Worse still, as commodity prices sank, profits from Glencore's trading division did not offer quite the downside protection that the company had said it would at the time of the flotation.

Even (Taiwan OTC: 6436.TWO - news) worse, investors started to fret about Glencore's debts, accumulated in the Xstrata takeover.

At Monday night's closing price, Glencore's stock market value was down to $16bn, but its debts stood at $27bn.

Strip out the value Glencore places on the metals it is holding or transporting around the world and that debt is closer to $50bn.

Which is why shareholders are worried.

Ivan Glasenberg, Glencore's chief executive, sought to tackle these issues two weeks ago when he announced plans to slash debts by $10bn by selling assets, freezing the dividend and raising $2.5bn from shareholders.

This involved Mr Glasenberg himself writing out a cheque for £138m.

That pain will have been felt right across the business. Mr Glasenberg and his fellow directors all became paper billionaires in the flotation.

All have now seen those fortunes shrivelled by the meltdown in the share price and are now mere millionaires - albeit rich ones.

Yet the betting is these former masters of the universe may have more pain to come. Several of them, including Telis Mistakidis, the head of metals trading, bought expensive homes in central London following the flotation.

If the mortgages on those properties were secured against Glencore shares, market gossips speculate, the banks may soon be on their backs demanding more collateral.

Of course, the bigger question is whether this company should ever have floated on the stock market in the first place.

Many investors steered clear, wary of its secretive behaviour and its flippant approach to corporate governance, which saw it go without a permanent chairman for nearly a year.

Some of us argued at the time of the flotation that, as Mr Glasenberg had built his career on knowing the right time to buy or sell a particular commodity, why would you want to buy one - Glencore shares - that he was selling?

Unfortunately for those who did buy, that warning has proved prescient.