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The Biggest IPO in History of Commodities Trading

|Includes: AAUKY, BX, FIG, GS, Xstrata Plc (XSRAF)

There was a lot of buzz over the weekend about a big happening in the commodities world. Glencore is one of the world's largest suppliers of commodities and raw materials and its no longer a secret that the company is planning an initial public offering as early as May of 2011.  If you haven't heard of Glencore, you're not alone1. The company prides itself on secrecy. In fact, the company was founded by Marc Rich, who was charged with tax evasion and illegal business dealings with Iran, but was pardoned by President Bill Clinton in 20012. Glencore has been accused of illegal dealings with rogue states since the 1970's. Specifically, the CIA believes that Glencore paid more than $3 billion in illegal kickbacks to obtain oil in the UN's Oil-for-Food program for Iraq2.

There's a well know Warren Buffet quote regarding IPO's. "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less knowledgeable buyer." The basic idea being that when private equity decides to take a property public, they are in effect calling a top in that market. When Goldman Sachs (NYSE:GS) went public in 1999, they rather effectively called the top of the market. When Blackstone Group (NYSE:BX) and Fortress Investment Group (NYSE:FIG) went public in 2007, it correlated heavily with a top in the private equity market. Therefore it stands to reason that since Glencore and Cargill are both allegedly planning public offerings this year, that we are at or very near the top of the great commodity bull run. The main effect of becoming a publicly listed corporation is to transfer financial risk from the owners to the shareholders. This would be the, "history repeats itself" side of the argument.

Before we jump to conclusions, I think its worth taking time to detail the "this time its different" side of the story. There are a lot of advantages to Glencore going public. The first among these is that the company can use shares as an acquisition currency. Secondly, a public offering allows departing partners to sell their equity without depleting working capital. There are some limits to how fast a private equity firm can grow. For example, a public listing would give Glencore the scale to undertake very large capital projects or transformational M&A, including the potential takeover of Xstrata (OTC:XSRAF) or Anglo American (OTCPK:AAUKY). Glencore already holds 34.4% of Xstrata, and Anglo American was the object of a proposed 2009 "merger of equals" that never happened.  So basically, going public gives the company the ability to leverage up.

There is reason to believe that this IPO could benefit shareholders as well.  According to the company factsheet, the company has total assets of $66.3 billion3 and last year London-based Liberum Capital Ltd valued Glencore at between $47 and $51 billion4. That's big enough to put Glencore in the FTSE 100, which translates into a lot of institutional buyers at index funds and pension funds that track the FTSE index. And lets not forget that shares of Goldman Sachs have walloped the S&P since its IPO.  If the prevailing demographic patterns regarding the growing rate of consumption in China and other emerging economies proves to be accurate, the next twenty years bodes well for firms exposed to the commodities sector.

There are of course risks with this company, as there are for any other. One unique risk for Glencore is the amount of scrutiny they will receive from environmentalist and anti-corruption campaigners. The mining industry in general, and Glencore in particular, does not have the best reputation in this regard. Another risk is that the companies well guarded trade secrets will be compromised, but I think this fear is ridiculous, none of the publicly traded broker-dealers have shut down their trading desks. Probably the greatest fear for an investor is that the metals & mining sector will have a correction or that China's economy will slow down, but if the later happens it will have far reaching implications for the global equities market and pull down all sectors in tandem.

2.  Ammann, Daniel (2009). The King of Oil: The Secret Lives of Marc Rich. New York: St. Martin's Press.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.