A Look At Glencore's Growth Ambitions

| About: Glencore Plc (GLCNF)

Glencore International (OTCPK:GLCNF) is a multinational commodities trading and mining company headquartered in Baar, a city in the Swiss canton of Zug, which is considered a tax haven within the confederation due to a fiscal legislation favorable to international holdings with activities outside Switzerland.

Glencore - which stands for Global Energy, Commodities and Resources - is the world's largest commodities trading company, with a global market share of 60 percent in the internationally tradeable zinc market, 50 percent in the tradeable copper market, 9 percent in the tradeable grain market and 3 percent in the tradeable oil market. Glencore has production facilities around the world and supplies metals, minerals, crude oil, oil products, coal, natural gas and agricultural products to international customers in the automotive, power generation, steel production and food processing industries; with $180 Billion in sales, by comparison, Apple (NASDAQ:AAPL) totaled sales of $130B in 2011.

Appetite for growth

While the revenue is impressive, Glencore's profit margins are thin, because it operates similarly to WalMart (NYSE:WMT), which has a 3.5% profit margin; it buys at 98 and sells at 100. Glencore's net income in 2011 was "only" $4.3B; in order to increase its profits and become one of the top companies by net income in the world, the firm plans to become a vertically integrated producer, buying mines, smelters and storage facilities for finished products.

Glencore already owns mines in Latin America, Kazakhstan and Africa, but it wants to grow fast: a few weeks ago it announced its intention to merge with Xstrata plc (OTC:XSRAY), one of the largest mining companies in the world, also headquartered in Zug, of which it already owns 34.4%.

The new group will be the world's biggest exporter of coal for power plants, and the largest producer of zinc; the combined entity will have a market cap of $90 Bil, sales will reach $210 Bil and will be able to compete against mining giants such as BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO). The deal is gaining support from Xtrata's major shareholders Blackrock inc. and Qatar's sovereign wealth fund.

Glencore also owns an 8.8% stake in Rusal, a Russian company which is the world's largest aluminum producer. Rusal in turn owns 25% of Norilsk Nickel, another Russian company, which is the world's largest producer of nickel and palladium. Glencore and Rusal have inked a deal which locks the Russian company into selling $43B worth of aluminum to Glencore over the next seven years. The deal has been criticized by Sual Partners Ltd., a majority Rusal shareholder, as it in practice turns Rusal into Glencore's private production unit. The contract will help Rusal service its debt, while Glencore will increase its marketing power.

Also worthy of mention, Glencore owns slightly more than half of Kazzinc, a large gold, lead, and zinc producer in Kazakhstan, worth up to $7.6 billion. It plans to increase its stake to 93%, making it the firm's largest single equity holding after Xstrata. It also owns 73% of Zambia's second largest mining company, Mopani Copper.

Glencore's appetite for global dominance is not limited to the mining industry. In fact, its agribusiness unit has recently struck a deal to buy Viterra Inc. (OTC:VTRAF) a large agriculture company with operations in Canada, the United States, Australia, New Zealand and China, turning Glencore into the largest global trader of wheat, barely and canola. Glencore already owns 270k hectares of farmland and more than 100 elevators and silos with a combined storage capacity of 3.8 million tonnes.

The company also is buying up assets in the energy sector; as I've already written, if the merger with Xstrata will go through, it will become the world's biggest exporter of coal for power plants. Among its assets, it owns 100% of Prodeco, currently the third-largest producer of export thermal coal in Colombia. It also aims to become an oil producer: it owns 50% stakes in various oil production subsidiaries of Russneft, one of the largest Russian oil and gas refiners and producers. Glencore also has stakes in two oil fields in Equatorial Guinea, worth about $1 Billion. Deutsche Bank estimates that the firm's annual crude oil production there will rise from near zero today to 24 million barrels by 2015. Glencore also raised its stake in Singapore's Chemoil to 89%; Chemoil is among the largest independent physical suppliers of marine fuel products in the world, with operations in Los Angeles, New York, Houston, Panama, Singapore and The Netherlands.

Financial ratios

As of this writing, Glencore's financial ratios are as follows:

Market Cap $47 Bil
Price / Earnings 11
Return on Assets 5.1%
Return on Equity 16.6%
EPS Growth (5 years) 40%
Debt to Capital


Dividend Yield 0.8%
Dividend Payout 26%

My Conclusion

I initiated a position in Glencore in March. The company could be a good long term pick if the growth strategy - becoming a vertically integrated producer - is well executed, especially the merger with Xstrata. It is going to take a while, so don't expect earnings to double in a few months. The dividend is peanuts, but considering that the firm is in "growth mode" and that the payout ratio is very conservative, there is ample room for dividend increases in the coming years.

Glencore is listed on the London Stock Exchange and in Hong Kong. U.S. investors can buy shares on the OTC market; trade volumes are thin, but individual investors should encounter no liquidity problems.

Disclosure: I am long (OTCPK:GLCNF)