Will Glencore survive the crisis they are facing?

"Glencore must stop bleeding now!" - Christopher LaFemina (analyst at Jefferies).

Four years ago, Glencore introduced the biggest flotation in the history of London Stock Exchange. Their message to the investors was clear - the company was unique compared to the others in the industry. However, today the company does not seem to be much different from its rival, if not worse. The market has been fluctuating and unlike its competitors, Glencore also has a large amount of debt. Investors have been doubtful about how the company is planning on paying this off hence the volatility in share prices.

The company has been reported to be one of the worst performers in the FTSE 100 index over the past year with their share price falling approximately 72%. Their share price decreased by about 30% on Monday during the last week of September - this was their largest reduction in the company's history which has happened in a single day. However, as a quick crisis management action, the company released a statement to their employees stating that they had a "strong liquidity profile" and were able to recover a large proportion of what they had lost on Monday. This suggests that the shareholders has a technical approach when dealing with their shares - they buy shares when the market has improved and sell them when it is declining. I believe that this is a sensible approach for those who are not risk takers.

Glencore has also been receiving some criticism about their business model but their have been different opinions on this. Some executives of rival companies believe that this is not true and that the main problem lies with their poorer quality assets. The company has been around for quite awhile now and it is not possible for them to survive this long without a good business model so I do not think that they should be making drastic changes to their business model. I believe that the main problem lies with the misleading figures in the financial statements.

In my opinion, one of the essential aspects for a company to be successful is to have the right financial statements. Understating the debt so that the figures look good is never a good idea. Management can convince themselves that they do not have a debt problem and they would also be providing false information to their investors. One of the Glencore investors suggested that the management team could not have predicted the current situation because they were not aware of a balance sheet problem. It could be that the management did not realise that they had a debt issue in the company because of the misleading figures in their statements. Considering all of this, one of their current targets should be to make the balance sheet look better.

As of June 30 2015, their net debt reached about $26.9bn which was about 2.7 times their annual earnings. This is a higher ratio compared to its competitors and the company should have been aware of the consequences. Glencore has already taken actions to rectify this and have launched a $2.5bn equity-raising as part of their plan. They are aiming to reduce their debt by about $10.2bn which should make their balance sheet look better and hopefully build up the confidence of their investors. The company is predicting that their share prices would increase once they manage to reduce their debt.

One of the key things to remember is that this was not a plan for the senior managers to make money while the company faces its downfall - this has been the case for some businesses in the past and it is essential that the stakeholders know that this is not the case. The value of Mr. Glasenberg's stake is $7.6bn lower than what it was earlier and the company is working on plans to recover from the current problem.

When investing in companies, I think it is better to use the portfolio theory and spread the risk so that if one investment goes downhill, you are not losing all of your investment.

Let me know what you guys think in comments below!