Glencore on Monday announced a fully committed proposed equity capital raising of up to US$2.5 billion to help reduce its net debt as financial difficulties continue in light of weak commodity prices.

The $2.5 billion raising will coincide with additional capital preservation / debt reduction measures which, taken together, have an aggregate value of up to $10.2 billion.

Together with additional portfolio optimisation and cost reduction actions, the company aims to reduce its net debt to the low $20s-billion by the end of 2016.

Initial cost reductions not enough

On 19 August 2015, Glencore announced its 2015 interim results in which a number of significant actions were outlined to protect Glencore's balance sheet in the current challenging commodity environment (as outlined below):

  • a reduction in industrial capital expenditure for the 2015 financial year to $6 billion, down from prior guidance range of $6.5 billion to $6.8 billion;
  • a reduction in industrial capital expenditure for the 2016 financial year to a maximum of $5 billion, down from prior guidance of $6.6 billion;
  • a reduction in costs of approximately $400 million in the 6 month period to 30 June 2015, with a further $400 million targeted during the next 12 months; and
  • a net debt target of $27 billion by the end of 2016.

In spite of these measures, and notwithstanding the Group's strong liquidity position, modest near-term debt maturities and positive operational free cashflow generation, the board has determined that, in light of the current market volatility and speculation it is prudent, and in all shareholders' interests, to implement the additional measures outlined in this announcement as soon as possible.

Dividend pay-outs suspended

In connection with the proposed $2.5 billion equity issuance, Glencore has received commitments from Glencore senior management in respect of 22% of the proposed equity issuance, and has entered into a standby equity underwriting agreement with Citi and Morgan Stanley in respect of 78% of the proposed equity issuance.

Glencore's balance sheet remains strong and the Group's committed lines of credit are assured. The board's confidence in the fundamentally positive prospects of Glencore, its quality of assets and marketing business, remains unchanged.

However, although the Group reported meaningful profits in the first half of 2015, the cash flows of its industrial assets are geared to commodity prices. In light of the other actions being announced today to strengthen and protect the balance sheet amid the current market uncertainty, the board has determined that it is right that a conservative stance be taken.

As a result, and despite Glencore's sound financial position, a decision has been taken to suspend the dividend until further notice, beginning with the final dividend for 2015. The previously announced interim dividend for 2015 of $0.06 per share will be paid.

This measure will save approximately $2.4 billion between now and the end of 2016, comprising approximately $1.6 billion in respect of the final dividend for 2015, and approximately $800 million in respect of the interim dividend for 2016.

Precious metals streaming and sale of minority participations in certain assets to 3rd party strategic investors

Glencore confirms that it is in discussions regarding a number of strategic transactions which will generate proceeds for the Group. These include, but are not limited to, proposed precious metals streaming transaction(s) and the minority participation of 3rd party strategic investors in certain of Glencore's agriculture assets, including infrastructure.

In aggregate, the Group is targeting to raise $2 billion from the sale of assets.

Ivan Glasenberg, Glencore’s CEO and Steven Kalmin, CFO, made the following statement: "Notwithstanding our strong liquidity, positive operational free cash flow generation, lack of debt covenants, modest near-term maturities and the recent affirmation of our credit ratings, recent stakeholder engagement in response to market speculation around the sustainability of our leverage, highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty.

"The measures we have announced today do not affect our core business activities and overall franchise value and have been designed to sensibly accelerate the deleveraging of our balance sheet, maximise future cash flow generation in the current weak commodity price environment and substantially improve our financial and credit metrics, stability and strength, in the event of a prolonged weaker pricing environment.

"We remain very positive on the long-term outlook for our business and this is reinforced by senior management's commitment to take up 22% of the proposed equity issuance.

"Copper and zinc are both supply-challenged and an essential ingredient of future global growth. In seaborne thermal coal, a capex drought and low prices have helped rebalance the market. We are confident that thermal coal's position and availability as the lowest cost fuel source for many large economies will underpin its key role in the global energy mix for many years to come.

"We have today an extensive portfolio of long-life, low-cost industrial assets, benefitting from the unique capabilities of our marketing business. We reiterate our 2015 full year marketing EBIT guidance of $2.5 billion to $2.6 billion and remain confident of our long-term guidance range of $2.7 billion to $3.7 billion."

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