Citi sees upside to Glencore equity

In their view, one of the main reasons for the volatility in the share price was the complexity of the company, with its combination of trading and marketing activities.

That problem could be reduced if the company distinguished more clearly in its financials between the two arms.

Indeed, if one applies conservative metrics to the balance sheets of each unit – 3.5 net debt to EBITDA for trading, a conservative two times on industrial assets and the bottom of guidance on earnings from marketing – then the implied level of sustainable net debt comes in at between $17-$20bn.

That is in line with the company’s target of approximately $20bn by the end of 2016, the team of analysts led by Heath R.Jansen said in a research report sent to clients.

Concerns over trade finance and letters of credit have been overplayed by the market, Jansen and his team added.

Also to be noted, like its peers between 85-100% of the commodity trader’s profitability accrues from volumes (trading/processing), alongside high leverage (>60% of capital structure mostly), Citi said.

The broker’s target on Glencore was kept at buy with a target price of 170p.

"We think the company’s strategy will be executed and the balance sheet will become robust and there is upside to the equity."