Glencore: A finger in every pie

By Gregory Mthembu-Salter in Cape Town

Posted on February 17, 2012 13:23

Secretive mining giant Glencore expands its activities across the continent after listing in the UK.

Secretive mining giant Glencore expands its activities across the continent after listing in the UK.

Flush with cash from listing on the London Stock Exchange in May 2011, Swiss commodities trader and mining giant Glencore has been on a buying spree in Africa and around the world.

Despite its listing in London, Glencore has not shaken off its old secretive ways and declined to talk to The Africa Report on the record.

Nonetheless, a source close to the company says, “The current environment is throwing up huge opportunities. Thanks to the listing, Glencore has the financial firepower to act.

And there are a lot of distressed assets out there going for good prices.” In late September, Glencore snapped up the Sable copper and cobalt processing facility in Kabwe, Zambia, from South Africa’s Metorex for $24.5m.

Earlier in the month, a consortium consisting of Glencore and South African politician-turned-tycoon Cyril Ramaphosa’s Lexshell 849 Investments proposed a cash offer for Johannesburg Stock Exchange- listed Optimum Coal that valued the company at R8.5bn ($1.1bn).

A few days after Glencore made the offer, two subsidiaries purchased Optimum shares, making an eventual takeover more likely. Glencore is best known as a commodity trader, yet its strategy of buying up mining assets dates back to the 1980s.

As one source close to the company puts it, “Because of Glencore’s trading operations, it sees opportunities that others just aren’t aware of. And it takes those opportunities, because mining assets not only assure the commodity-trading side of the business of supply, but also give Glencore exposure to commodity prices.”

According to Gregory Lotis of Johannesburg-based commodity trader Metmar, it has become increasingly important for traders to have their own guaranteed sources of supply, since it is harder than ever to make a profit off arbitrage and trading alone.

“For the past 15 years, in fact ever since the invention of the internet, which has enabled everyone to discover prices in real time, it has been a big advantage as a commodities trader to have your own mines.”

Cyril Jutronich, another Johannesburg-based commodities trader, says another consideration is the increased interest of Chinese companies in purchasing global mineral assets, which is stoking competition.

“The arrival of the Chinese is definitely a factor here. They want the mines. They want the products to go to China,” he argues.

The big downside in acquiring physical assets is taking on political risk. Yet Glencore has always embraced this risk, doing business from Colombia to Kazakhstan and the Democratic Republic of Congo (DRC).

Glencore has stakes in three mines in the DRC. It shares two of the mines, Katanga Mining and Kansuki, with Israeli mining mogul Dan Gertler.

Gertler, who has a close relationship with the DRC’s President Joseph Kabila, is currently under fire from transparency and anti-corruption campaigners for acquiring state mining assets on the cheap and then selling them on for vast profits.

In Zambia, where Glencore owns 73 per cent of Mopani Copper Mines (MCM), the new government headed by President Michael Sata has already temporarily suspended export licences, launched a review of the mining sector and said that it will want much higher state shareholding in mines.

A senior source close to Glencore says, “Glencore picked up its Zambian assets some years ago, during the privatisation [of the late 1990s]. At that time, the government really wanted people to come in. The government should be happy now that Glencore is there and has invested.

It has already invested $2bn. But loans have to be repaid before the company can alter share structures. And anyway, I don’t think they would get a big benefit from increasing the government’s share.”

“In general, political risk in Africa is exaggerated,” the source added. “There is political risk everywhere in this world. All governments want a bigger slice of the cake…In fact, the political situation is more stable in Africa then in the past.

The risk in Africa is on the infrastructure side. And here mining companies can play a big role because it is key for us to have infrastructure functioning.

Infrastructure is a major constraint on mining growth. Richards Bay Coal Terminal has been upgraded to handle 91m tn of coal, but the railways feeding the port are a weak link

That is why, for example, in the DRC, Glencore is building electricity capacity and railways.” In addition, Glencore is increasing its refining capacity in the DRC, in response to a government demand that minerals be processed locally.

In South Africa, Glencore’s main logistical constraint is transport. According to the source, “Richards Bay is good. It has been upgraded to handle 91m tn, and it works well.

But now it’s the railways feeding the port. They have not been upgraded, and they can only handle 65-70m tn. But Glencore can’t fix that, that is up to Transnet.”

Glencore is a fabulously wealthy company. It had revenues of $92.2bn, and profits before interest and taxes of $3.3bn during the first half of 2011, 50 per cent more than during the first half of 2010. It also has assets with an estimated value of $81.4bn.

A critical issue for Africa, in addition to Glencore’s investments in the continent’s productive capacity and infrastructure, is whether the company pays the right amount of tax.

According to Andreas Missbach of the Berne Declaration, a non-governmental organisation that monitors the activities of Swiss corporations, banks and government agencies, “Glencore’s tax arrangements may be legal, but they are not ethical.

The company pursues aggressive tax avoidance strategies that violate the spirit of national tax laws. The strategies violate the social obligation that you should pay your fair share of tax.”

Missbach pointed specifically to Mopani Copper Mines, where a draft audit conducted by Grant Thornton on behalf of the Zambian Revenue Authority was leaked in February 2011.

It criticised Glencore for its lack of transparency and poor cooperation with the auditors. The audit expressed strong doubts that MCM was paying enough tax.

The European Investment Bank (EIB) then halted all lending to Glencore, based on what it said were “serious concerns” about the company’s governance.

Glencore later issued a statement saying it welcomed an EIB investigation, accusing the leaked audit of containing “fundamental factual errors” and affirming MCM’s confidence “that the amount of tax it paid had been correctly calculated.”

A new MCM audit is under way that Glencore claims will leave it “totally vindicated”, but it is not yet clear when this will be completed.

A Glencore source, who (again) declined to be named, denied that the company aggressively pursues tax avoidance strategies, adding that the publication of Glencore’s first sustainability report in September and its public support for the Extractive Industries Transparency Initiative demonstrated that the company is a responsible corporate citizen.

However, Missbach dismissed Glencore’s sustainability report as “very weak on detail and lacking in substance”. The year 2012 will bring more deals in Africa and elsewhere.

In addition to Optimum Coal, the company is, among other assets, eyeing further oil blocks in Equatorial Guinea and commercial land acquisitions in the former Soviet Union.

Glencore controls a 34.5 per cent stake of Xstrata, which gives it further significant indirect exposure to nickel, zinc and coal assets in South Africa and Tanzania (see map further down). There has been much speculation about a merger between the two companies, with a Credit Suisse note talking up prospects in October.

Overall, Glencore retains a bullish outlook despite current global economic woes.

As the Glencore source put it, “There are over 2 billion people in India and China, and they all want access to stuff … We produce and trade that stuff…We are effectively the DHL of the commodities world.”

Glencore’s greater reach, inevitably, will bring greater scrutiny to its operations.

While the companymay be vindicated by a complete audit of its Zambian operations, the broader charge that it violates the spirit of national tax codes will be harder to refute.

The company needs not only to be doing the right things, but also needs to be seen to be doing so.

And on this score, compared to competitors that have been focusing on this for years, Glencore still has a lot of opening up to do.

This article was first published in the November edition of The Africa Report, on sale at newsstands,
via our print subscription or our digital edition.

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