Commodity Trader's Profits Up 45%

Swiss-based Glencore International AG is the world’s largest commodity trader posted earnings of $979 million for the third quarter, up from $677 million in the second quarter. For the first nine months of 2010, the company’s net income rose from $1.79 billion to $2.54 billion, a jump of 42%. Glencore, which is privately held, is thought to be positioning itself for an IPO in the first half of 2011.

Glencore is one of a handful the world’s largest commodity traders, which includes France’s Louis Dreyfus Group and Trafigura, Holland’s Gunvor International B.V., Swiss-based Mercuria Energy Group, and Dutch-Swiss Vitol Group, the world’s largest oil trader.

According to the Financial Times, Glencore attributed its booming profits to “enhanced” margins for its mine production and “attractive market conditions” for its rising profits in agricultural products. Total sales for the first nine months of 2010 equalled $105.9 billion.

Glencore owns about 35% of Swiss mining giant Xstrata plc (OTC: XSRAY), with which it has been discussing a reverse merger since earlier this year. Glencore issued $2.3 billion convertible debt to strategic investors in December 2009, signalling that it is seriously considering an IPO. The debt issue valued the company at about $35 billion. Xstrata’s current market cap is around $60 billion. Combined, the two companies approach the market cap of Rio Tinto plc (NYSE: RIO).

Currently, 485 employees own the company. Of that number, 65 company executives own 57.5% of Glencore. According to Bloomberg, an IPO would raise on the order of $10 billion. The FT notes that some bankers believe Glencore’s value, by itself, is around $50-$60 billion. If that’s the case, then the company would probably need to offer 15%-20% of its shares in order to raise $10 billion.

Before an IPO is held, Glencore is likely to spin-off or put together an IPO of its Kazakh gold mine holding, Kazzinc. The company owns a majority of Kazzinc, which is expected to produce 700,000 ounces of gold in 2011 as well as zinc, lead, and copper.

Whether Glencore does an IPO or a reverse merger with Xstrata probably depends to a large degree on whether or not Glencore can set a number on its value to Xstrata shareholders. The mining operations it owns are relatively easy to value, but its trading operations are gigantic and complex and are probably worth more than sum of the parts.
If Glencore does become a public company, it is also likely that some of the other privately-held traders will follow suit. In order to stay competitive with Glencore, they, too, will need access to the public markets.

Paul Ausick