Highlight in the week of September 28, 2015

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of September 28, 2015:

  • ALCOA to split into 2 separate public companies.
  • Carl Icahn, warns that markets are overpriced.
  • Glencore falls to record low.

On Monday, September 28, metals firm ALCOA (NYSE: AA) said  it would split into two publicly traded entities, separating a faster growing plane and car parts business from traditional aluminum smelting operations as shareholders seek higher returns amid a commodity slump.

Klaus Kleinfeld, Alcoa chairman and CEO, said on Monday that it was the

right time to split the business.

He also said the right size, strength and scale of the two businesses

allows us to put both businesses onto their own path independently to pursue their own strategies, which are very distinct.

New York-based Alcoa’s traditional smelting business has been hurt by a ballooning surplus of aluminum, which has caused prices to sink and deepened the industry’s worst crisis in years.

After the split, one company, which will take the Alcoa name, will have five business units including bauxite and aluminum, while the second company’s portfolio will be comprised of engineered products, global rolled products and transportation and construction solutions.

The split is expected to be finalized during the second half of next year. The name of the second company will be determined before the closing of the transaction

On Wednesday, September 30, legendary investor Carl Icahn said in an interview on CNBC, that he thinks that markets look “way overpriced” and many investors have put themselves in “dangerous” positions.

Icahn stressed many of the points he made in a video posted this week titled “Danger Ahead.” He said stocks could see a tough run amid the Federal Reserve’s near-zero interest rate policy and headwinds like financial engineering for the sake of earnings growth.

On Wednesday, September 30, he said:

I think earnings are misstated and sort of a complete mirage

In below video, entitled “Danger Ahead” Icahn also warns about potential problems caused by tax loopholes, stock buybacks and liquidity in the high-yield bond market.

On Monday, September 28, Glencore Plc (GLEN.L), the Anglo–Swiss multinational commodity trading and mining company headquartered in Baar, Switzerland, dropped as much as 17.4 percent in London, as can be seen from below 5-day chart.

The biggest one-day drop since the company started trading in 2011.

The company was created through a merger of Glencore with Xstrata on 2 May 2013. As of 2014, it ranked tenth in the Fortune Global 500 list of the world’s largest companies. It is the world’s third-largest family business.

The company has lost more than 70 percent of its value this year, as can be seen from the company YTD-chart as commodity prices have slumped, making it the worst performer in the FTSE 100 index.


Alcoa is the latest big materials company to embark on a trip back to the future by proposing to split its so-called “upstream” aluminum making and bauxite mining business, from its “downstream” specialist metals group which makes high-value products for the aviation and automotive industries.

What Alcoa’s doing is a variation on a theme started during this round of the break-up season by BHP Billiton, the world’s biggest resources company, which spun off an assortment of mining assets into a new business called South32.

A global glut of aluminum, which has depressed prices, has battered Alcoa stock, driving the company’s market value this year down to about US$12 billion as can be seen from below chart.

Alcoa has faced this problem for decades: No matter what they have done to enhance their product line, their stock has traded based on metal prices.

Carl Icahn:
Billionaire investor Carl Icahn thinks stocks could go down “a lot more” as the market comes to grips with bubbles exacerbated by the Fed’s zero interest rate policy.

In an interview he said:

It’s like giving somebody medicine and this medicine is being given and given and given and we don’t know what’s going to happen – you don’t know how bad the end of this is going to be

He also said

We do know when we did it a few years ago it caused a catastrophe, it caused ‘2008, so where do you draw the line here?

Low rates are one of five major worries Icahn outlines in the video, along with tax loopholes, financial engineering of earnings, balance sheet-weakening stock buybacks, and strains on the high-yield bond market.

Amid his concerns, Icahn said he has hedged his investments much more.

In another stark example of the fact the commodity supercycle is over is the fact that, Glencore shares tumbled almost 30 percent to close at an all-time low on Monday, September 28, on fears that the mining and trading company was not doing enough to rein in its debt to withstand a prolonged fall in global metals prices.

As can be seen from below all-time chart of Glencore, we see that the company’s share are almost down 85 percent from their IPO value of May 2011.

Based on the above, Glencore looks like the next big miner heading to the chopping block with shareholders demanding a radical overhaul after the company was savaged on the London Stock Exchange by investors who have become alarmed about falling commodity prices and Glencore’s high levels of debt.

The amusing part about the fear surrounding Glencore is that its problems have been obvious for years and date back to its US$41 billion merger with Xstrata in 2012, a deal which brought together a pure miner in Xstrata with one of the world’s biggest commodity traders in Glencore.

The core problem, which can probably only be fixed by Glencore ejecting Xstata just three years after acquiring it, is that the mining business (mainly Xstrata assets) functions best without high debt levels as they ride the commodity cycle.

Glencore, as it originally operated, needs high debt levels to fund its commodity trading activities.

The core problem, which can probably only be fixed by Glencore ejecting Xstata just three years after acquiring it, is that the mining business (mainly Xstrata assets) functions best without high debt levels as they ride the commodity cycle.

Glencore, as it originally operated, needs high debt levels to fund its commodity trading activities.

Bringing two very different businesses under the same umbrella was an “oil and water” deal; mining and commodity trading could never mix comfortably and a crisis was guaranteed should commodity prices fall sharply, which is what’s happened.

Breaking-up of mining companies:
Breaking up is proving to be the favoured option of mining companies under financial pressure as Alcoa joins BHP Billiton (BHP.AX) in a voluntary division, and with Glencore drifting towards an involuntary split.

Others could follow; Rio Tinto (RIO.AX) and Vale (NYSE:VALE) are under the same pressure to cut costs as low commodity prices destroy profits and shareholders demand action.

Breaking up might be hard to do but sometimes it is essential.

Based on the company’s business, model, fundamentals and Swiss roots, we believe that Glencore current share price might be a good entry point for longterm investors.

Last but not least, when analyzing market behaviour, always remember below quote of John Maynard Keynes;

Markets can stay irrational longer than you can stay solvent.”

Secondly before taking any investment advise, always take your investment horizon and risk tolerance into consideration.

Thirdly, remember that we currently are living in the age of turbulence which is very volatile and that sharp corrections may happen at a sudden.

Until next week.

Yours sincerely,

Suriname Times foto
Eric Panneflek

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