Glencore reserves should be valued higher - analysts

JOHANNESBURG (miningweekly.com) – Investors should be prepared to value the reserves of metal that Glencore owns more highly to reward the proactive approach that the London- and Johannesburg-listed diversified mining company has to managing its assets.

Reflecting on the decision of Glencore to pull metal from the market during the crisis of 2015/16, Bernstein analysts Paul Gait, Jonathan Absolon and Catherine Tubb show in a note just published that deferring production during periods of low commodity prices is almost invariably the correct thing to do.

“We believe that the actions of Glencore in the zinc industry preserved $1-billion of value for shareholders,” the analysts calculate.

They portray as wrong simply mining at a fixed rate until a deposit is exhausted, irrespective of market conditions, and show that poor decision-making during the last downturn destroyed significant value.

Quoting value preservation as the main reason that Glencore CEO Ivan Glasenberg left metal in the ground during the 2015/16 commodity price crisis, the analysts call for this sort of remedial action to command a premium in the market.

Crediting Glencore with understanding that there is such a thing as a "correct value" for commodities, the analysts contend that departures from this price level are self-correcting because of geological deposits having finite horizons.

Quoting the assertion of author TS Lovering that rich mineral deposits are a nation's most “valuable but ephemeral” material possession, they argue that tonnes be left in the ground if bringing them to surface does not generate a sufficiently high return to justify extraction.

They find that the tendency for prices to recover favours waiting until they do so before producing.

Conversely, continued mining in low price margin environments foregoes the chance to benefit from price recovery. In effect, material dumped on a market that does not want it decimates value and hurts the economies of host countries.

The timing of bringing deferred production back on line is seen as value critical. To the extent that the price is above the long-run mean-reverting fair value, the best is to produce as quickly possible, but to the extent that the producer can expect to receive less than the "correct" margin, the best decision is to keep the tonnes in the ground, the analysts contend in a note to Creamer Media’s Mining Weekly Online.