Glencore is optimistic about its prospects after Zuma

In 2015, Glencore was strong-armed out of Optimum Coal at the height of the Gupta’s power in South Africa. Under the Ramaphosa presidency the company’s prospects look rather different.

When Swiss commodities giant Glencore announced its interim results in June, it made it known that it has plans to expand in a post-Zuma South Africa. The fact that Glencore’s former business partner, Cyril Ramaphosa, is now president would have likely played a role in that decision. Ramaphosa was selected by Glencore to be its BEE partner in Shanduka Coal in 2005, and again for Glencore’s South African-based company Optimum Coal in 2012.

Recent newspaper reports suggest Glencore could make a bid to repurchase Optimum Coal, which is in business rescue. However, they are also backing a BEE consortium in the purchase of Chevron SA, a deal that looked as if it was going in favour of the China Petroleum & Chemical Corporation (Sinopec) when South Africa was still under the grip of Jacob Zuma’s presidency.

Chevron SA includes an 110 000 barrel-per-day refinery, oil storage facilities, 820 petrol stations and a lubricants plant.

In March this year, Sinopec received approved from South Africa’s competition authorities to purchase Chevron SA. However, by then, Chevron SA’s 25% minority shareholder, backed by Glencore, had signalled its intention to exercise its right of first refusal to purchase Chevron SA.

In late August, the Competition Commission approved a $973-million deal for Chevron SA by the Glencore-backed investor, Off the Shelf Investments 56. The Competition Tribunal approved the merger in mid-September.

The transaction was the first of two. The second transaction, which would still have to be approved by the competition authorities after it is notified, will see Glencore purchase 75% of Chevron SA from Off the Shelf Investments 56.

The terms of the first merger sees Off the Shelf Investments 56 committing to spend R6 billion to upgrade Chevron SA’s refinery in Cape Town, even if the subsequent proposed transaction with Glencore failed.

At the merger hearing, Competition Tribunal chairperson Norman Manoim asked if Off the Shelf Investments 56 was going into the transaction with its “eyes open” due to the “quite enormous” obligations.

Record profits despite scandals

Glencore, which has operations in 50 countries, is the successor to Marc Rich and Company, the commodities trader that launched in the mid-1970s.

In the 1980s, Rich fled America after the US justice department began investigating Iranian oil deals he was involved in. On the final day of his presidency, Bill Clinton granted Rich a controversial pardon.

Glencore CEO Ivan Glasenberg has been at the helm since 2002 and oversaw the company’s listing on the London Stock Exchange in 2011. He is reported to personally hold an 8% shareholding in Glencore. While Glassenberg may be bullish on Glencore’s prospects in South Africa, the company has had a nightmare 2018, with one business analyst referring to its performance over the last six months as “particularly horrific”.

Glencore has faced court injunctions and asset freezes in the DRC and ongoing US and UK investigations into suspected corrupt business dealings. On top of this, it is facing a lawsuit in Venezuela related to bribery, as well as US sanctions, which have been placed on a number of its business partners.

Even though the company’s share price is down by 20% year-on-year, its profits just keep rolling in. Interim results released in June this year suggest that Glencore has had its most profitable six months ever, announcing earnings of $8.5 billion in the first half of this year, with revenue up 8% to $108.6 billion and after-tax profit up 15% to $2.6 billion.

The strong fiscal performance was driven mostly by boosted profits on coal, copper and cobalt.

US sanctions

In November 2017, details of the second-biggest data leak in history began to emerge through the Paradise Papers, a set of 13.4 million confidential electronic documents relating to the business arrangements for offshore investments. The Paradise Papers were leaked to German newspaper Süddeutsche Zeitung.

As a result of the leak, it was reported that Glencore had secretly loaned millions of dollars to controversial Israeli billionaire businessman Dan Gertler, who it had tasked with securing mining rights in the DRC. 

The revelations resulted in human rights organisation Public Eye filing criminal charges against Glencore in Switzerland.

Gertler was placed on a US sanctions list in December 2017 for “corrupt and opaque deals”, and Glencore was forced to stop making royalty payments to him.

Washington alleges that Gertler acts as a fixer for mining interests in the DRC, using his close friendship with President Joseph Kabila to do so.

Another business partner of Glencore, Russian aluminium tycoon Oleg Deripaska, was also placed on a US sanctions list in April 2018, forcing Glencore to cancel a planned share swap with his company, United Company Rusal.

March this year, the Venezuelan state oil company Petroleos de Venezuela (PDVSA) named Glencore in a lawsuit, listing the company among a host of trading companies that are alleged to have bribed employees at PDVSA to provide inside information on oil deals.

Problems in the DRC

Glencore has had a torrid time in the DRC this year, which is significant because operations in the country are said to account for about a quarter of the company’s value. Glencore produces about a third of the world’s cobalt supply from the DRC, which is home to 48% of the world’s cobalt reserves.

Cobalt is used to manufacture the lithium-ion batteries that power cellphones, electric cars and various other things used in the defence sector.

In April, Glencore’s assets in the DRC were frozen through a court order after legal action from Gertler, who wanted his royalty payments. The injunction granted by the court affected Glencore’s operations at Kamoto Copper Company (KCC) and at its copper mine Mutanda Mining.

The court ruled that Gertler was owed $695 million by Mutanda Mining and $2.28 billion by KCC. Glencore’s workaround tactic in dealing with the US sanctions was to pay Gertler in currencies excluding the US dollar without involving US citizens.

In May 2018, the UK’s Serious Fraud Office announced it was planning a full probe of Glencore’s business dealings in the DRC, while in July, the US justice department served Glencore with a subpoena requesting documents and records relating to its business activities in Nigeria, Venezuela and the DRC between 2007 and 2018.

The documents and records requested relate to compliance with the US Foreign Corrupt Practices Act and other statutes relating to money-laundering.  At the time, Glasenberg was quoted as saying that Glencore takes ethics and compliance “very seriously” and would cooperate with the US justice department.

Investigations of this nature can take between two and four years to complete, so the matter is expected to hang over Glencore for a while.

New mining code in the DRC

Another headache for Glencore in the DRC was a legal dispute between its Toronto-listed Katanga Mining and its partner Gecamines in the KCC.

Gecamines is a state-owned mining company in the DRC and the dispute centered on KCC being cash-strapped.

In June, Glencore announced the matter had been resolved through the conversion of $5.6 billion of KCC’s debt into KCC shares and the payment of $191 million to Gecamines, which in turn would drop their legal action.

Then, in June 2018, President Kabila introduced a new mining code to much resistance from mining companies. In effect, new stipulations in the code have increased mining companies’ costs, with the royalty rate increasing from 2% of net revenue for copper and cobalt to 3.5% of gross revenue.

The new code also provides for a potential “windfall tax” and has nullified a “stability” clause, which means that changes to revenue could only be introduced in another decade.

Glasenberg has spoken out in the media about how negotiations with the Congolese government over the new mining code were ongoing, as well as Glencore’s intention of pursuing legal avenues to get the code repealed.

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