Shares in Glencore (GLEN) have slumped by almost 4% to 309p after the mining company announced it is under investigation. US regulator the Commodity Futures Trading Commission (CFTC) is to probe the company over potential corrupt practices linked to commodities.

The company said the CFTC investigation is similar in scope and subject matter to the current investigation into the firm from the US Department of Justice (DOJ).

The DOJ is probing Glencore over money laundering related to its operations in Nigeria, Venezuela and the Democratic Republic of Congo.

The company added it will cooperate with the CFTC, and that its response will be managed by its Investigations Committee, which was set up in July 2018 to oversee its response to the investigation by the DOJ.

TRACK RECORD

This latest blow comes after the former head of Glencore’s copper business was fined $1.8m in December by Canadian regulators and banned from serving as a company director for four years, following misleading financial statements issued by the company’s Congo subsidiary.

BMO Capital Markets analyst Edward Sterck warns that the investigation could lead to further fines if Glencore is proven guilty, although that outcome is far from certain. In a fair legal system even corporations are innocent until proven guilty.

But investors will be wary of another threat hanging over the company, one that could drag on the share price for some time. The investigation is likely to prove complex and could take several years to play out.

TAKING A TOLL

Glencore has had a tough time recently, missing earnings forecasts in its 2018 full year results and also having to deal with unfavourable changes to mining laws in the Democratic Republic of Congo. That led to royalty rates being pushed up, new taxes imposed and policies introduced that will restrict the repatriation of profits.

Though while the company has a cocktail of problems to overcome Sterck remains upbeat on its prospects. He highlights Glencore’s attractive valuation, and 2019 and 2020 free cash flow (FCF) yields of 12% to 16% respectively. The analyst calculates peers averages of closer to 9% in 2019 and 2020.


Issue Date: 26 Apr 2019