Macquarie downgrades Glencore to neutral, awaiting guidance

Macquarie downgraded its recommendation on shares of Glencore to 'neutral', telling clients that the commodity trader's "impressive debt reduction is now largely priced-in".

However, analysts Alon Olsha and James Oberholzer bumped up their target price on the stock from 180p to 200p.

The company quickly set itself apart from its peers with its debt reduction plans, despite being greeted with some incredulity by markets, the analysts said. Just over ten months on no other outfit has slashed its gearing as quickly or by as much as Glencore and the scope for a further reduction remains high, Olsha and Oberholzer said in a research note sent to clients and dated 18 August.

"Indeed, we believe that management’s credibility has been restored and even burnished by solid execution of their realistic and value-preserving crisis plan."

Macquarie forecast the trader would be able to cut its net debt to $16.8bn for fiscal year 2016, to just below the company's guidance of between $17bn-$18bn. However, should the firm manage to hive off its Vasilkovskoye gold mine then net debt could fall to as low as $15.0-15.5bn.

For its part, the broker only expected a streaming deal for Vasilkovskoye.

Nevertheless, following the sale of an approximately 10% stake in agricultural unit disposals has dried up. That was in part a result of improved market conditions and thus better free cash flow, which meant the pressure on Glencore to divest assets had lessened, according to the analysts.

"Nevertheless, fewer asset sales reduce the number of stock catalysts and limit the scope for guidance-beating debt reduction, in our view."

With a view to the company's interims on 24 August, Macquarie said the key areas to focus on would be its marketing EBIT guidance, an update on asset sales and guidance on when it expects to resume the roughly 500kt of zinc output cut last year.

The latter would be be important to influencing zinc market sentiment and the outlook for fiscal year 2017 earnings, Macquarie said.