Shares in FTSE 100 mining giant Glencore (GLEN) fell over 5% to 186p after it scrapped its proposed dividend having swung to a loss and reported a rise in net debt.
The Swiss miner and commodities trader was hit by lower commodity prices earlier this year during the height of the coronavirus pandemic and ensuing economic uncertainty, with thermal coal, oil and zinc prices taking the most significant hit.
In the six months to 30 June, the firm reported a net loss of $2.6 billion, compared with a profit of $226 million a year earlier, after taking $3.2 billion of impairment charges, including a $1 billion hit on the value of its struggling Colombian coal assets.
Revenue dropped 34% to $70 billion, mainly due to the lower commodity prices.
‘INAPPROPRIATE TO PAY DIVIDEND’
Net debt subsequently jumped 12% to $19.6 billion, leading Glencore’s board of directors to cancel a proposed $2.6 billion dividend as it prioritises a reduction in debt.
Chief executive Ivan Glasenberg said, ‘The outlook remains uncertain in the short term.
‘Notwithstanding our cash-generative business and secure liquidity positions, the board has concluded that it would be inappropriate to make a distribution to shareholders in 2020, instead prioritising the acceleration of net debt reduction to within our target range (<$16 billion), currently expected to occur by the end of 2020.’
But in a media call reported by the Financial Times, Glasenberg told reporters, ‘Let’s see how the market performs, how Covid is affecting supply and demand for commodities’, before stressing the company will be generating $4.1 billion in free cash flow this year at current commodity prices, and adding that ‘debt will come down’.
One bright spot for Glencore was its marketing division, which delivered record adjusted earnings before interest and tax of $2 billion, as it borrowed money to buy cheap barrels of crude oil in March and April and then sell them in the futures market for a profit.
Given the challenging conditions overall, Killik & Co analyst Andrew Duncan said Glencore performed ‘admirably’ in the first half of this year, highlighting the strong performance in the marketing business, which has led Glencore to raise full-year earnings guidance for the division to the top end of its long-term target range of $2.2 billion-$3.2 billion.
Duncan said, ‘Many commodity prices have improved significantly since the height of the COVID-19 disruption, giving us confidence that the second half performance in the Industrials business will be better than the first.
‘Whilst the dividend suspension is a slight disappointment in the short term, it is a sensible decision given the ongoing uncertainty, and arguably puts Glencore in a better position to deliver on long-term opportunities.’