Trading arm is the key to miner’s value

NEGOTIATIONS over Glencore’s valuation are set to focus on the mining giant’s trading arm as commodity investors worry about the possible departure of key traders and the intangible nature of the people side of the business.

“When you have hard assets you know the price for a metal and on that basis you are able to have a relatively high level of certainty,” Olivetree Securities’ Christian Georges told City A.M. “Whereas with trading... there’s a question mark over the ability of a trader to get it right.”

Glencore argues that its trading arm should add a premium to its value because it makes its “earnings less volatile than those of equivalent pure commodity producers”.

Its sizeable share of the market for traded commodities – it trades 60 per cent of marketable zinc and 50 per cent of marketable copper – could also give the company a degree of pricing power, although there is no suggestion that it could manipulate the market.

But mining investors are wary of buying into a trading arm where many of the key figures could cash out after a few years. “There’ll be a little bit of pressure on pricing because fund managers won’t want to feel they’re taken advantage of,” says Renaissance Capital’s Jonathan Williams.

Many have compared Glencore’s float to that of Goldman Sachs in 1999, with one industry source saying: “They’re seen as flash and arrogant, a bit like the Goldman Sachs of the industry.”

A third sky-high valuation from one of the banks on the deal emerged yesterday, with Bank of America Merrill Lynch analysts valuing the company at a maximum of $70bn (£43bn) in addition to the $9-$11bn to be raised by the float. Barclays Capital and Credit Suisse have put similarly high values on the firm.

Oriel Securities’ Charles Cooper says that Glencore’s equities assets, which include stakes in Rusal and Xstrata, were worth $20bn alone. But on corporate governance he said: “Who wouldn’t have concerns with a company with stakes in state-run mining enterprises from Armenia to Zimbabwe?”