Glencore’s attempt at reinventing mining has run into trouble

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FROM THE edge of the Kamoto Copper Company’s pit, it is hard even to see the mechanical diggers toiling dozens of tiers below. The 280-metre hole on the southern edge of the Democratic Republic of Congo is deeper than Africa’s tallest building is tall. Lorries take the best part of an hour to crawl out from its heart. The greenish ore they lug is given its hue by copper but much of its value by cobalt nestled within. Usually driven to South Africa, then often shipped to China, the cobalt will emerge from a series of factories as the priciest component of a battery powering a smartphone or, increasingly, an electric car.

A sign at the mine indicates it is 1,320km to Kinshasa, the capital, half a week’s drive away. Another arrow points to a less likely destination: Baar, a sleepy suburb of Zurich, 6,600km away at the foot of the Swiss Alps. Located in a business park there are the headquarters of Glencore, the company that ultimately controls the Congolese mine. Once a commodities trader that merely bought and shipped stuff others dug out of the ground, in recent years Glencore has gatecrashed an august club of global mining companies, such as Rio Tinto and Anglo American, whose histories stretch back to colonial times.

Its transformation has not been problem-free, however. Glencore’s dealings in Congo have landed it in a hole as deep as Kamoto. Authorities in America, Canada and Britain are probing whether its executives, known in the industry for their sharp suits and elbows, deployed even sharper business practices to get ahead. Investors have started to question the firm’s prospects; its share price has slumped. Mining firms once encouraged to emulate Glencore’s aggressive culture now wonder whether their old-fashioned approach might not have more merit after all.

Glencore is to mining what Goldman Sachs is to high-street banking: nominally in the same trade but in a turbo-charged way. Like the Wall Street stalwart, it thrived first as a private partnership, set up in 1974 as Marc Rich + Co. Its eponymous founder gained fame as a consummate trader, and infamy for evading American authorities irked by his busting of sanctions and dodging of taxes. (He was ousted from the firm in 1993, after which the company was rechristened Glencore.)

When the firm listed its shares in London in 2011, it was the first in a generation to be propelled straight into the blue-chip FTSE 100 index. Its top brass, particularly Ivan Glasenberg, a brusque South African who joined in 1984 and who has been chief executive since 2002, were lauded as visionaries in a staid field. At least five senior executives were revealed to be billionaires—almost unheard of for employees rather than founders of any company, whatever the industry. Around 40 top traders held shares valued at over $200m each.

Bosses of mining firms are mostly engineering types, as comfortable down a mineshaft as in a boardroom. An accountant by training, Mr Glasenberg’s spiritual home is the trading floor. Unlike hedge funds, commodities-traders do not make money on fluctuating prices, but by working out how to get the best price for whatever they can source. The job is more logistics than speculation. A wrinkle in markets might mean a pile of high-quality coal and a low-quality one are worth more if blended together into a medium-quality grade. Access to natural resources is vital, and tricky. In recent years, Glencore has made loans to “state-owned” oil firms in Libya and Iraqi Kurdistan, for example, to be repaid in barrels. (That trick works so long as the “state” in question keeps control of the oilfields.) Glencore handles over 90 commodities, from soyabeans to aluminium.

Trading is a fabulously lucrative business. Returns on equity at Glencore’s operation can top 40% a year. But there are limits to how big it can get. So Glencore branched out. Instead of just securing the offtake of mines, it wanted to own them. With little in-house engineering nous, it has mostly bought facilities set up by others (or so sniffy rivals decry). Its transformation was complete when in 2013 it took full control of Xstrata, a big coal and metals venture.

Glencore is now overwhelmingly a mining group—around two-thirds of its $8.6bn in adjusted operating profits last year came from stuff coming out of the ground. But its DNA is still that of a trader’s. Sometimes it cuts its own production to support prices: a sort of one-firm OPEC. It is nimbler than rivals, and more opportunistic. “Glencore has a different culture to other miners. They are quick, they trust their own judgment,” says Paul Gait of Sanford C. Bernstein, a research firm.

The superlatives are less frequently heard now than they were at the time of listing. Investors who bought Glencore shares at the time have lost 48% of their money since 2011—a worse return than any of its big FTSE mining peers except for Anglo American (see chart). Mr Glasenberg failed to spot a commodities-price wobble coming in 2015. A humbling $2.5bn capital infusion was required to fix the balance-sheet. After recovering, its shares have slipped again since the start of 2018 and trade at just 7.3 times this year’s estimated earnings.

Many people in mining think Glencore’s buccaneering business model is now haunting the firm rather than helping it. Mr Glasenberg’s strategy has been not so much contrarian as actively seeking out opportunities others shun. His firm has snapped up coal mines that rivals have been all but forced to divest by environmental activists: it is now the world’s biggest seaborne exporter of thermal coal, for example. Peers might panic at being exposed to Vladimir Putin’s Russia; Glencore has stakes in Rosneft and Rusal, two firms active in oil and aluminium respectively, both battling American sanctions.

Most worrisome to investors has been its investment in Congo, a country avoided as too risky by Glencore’s big rivals. Tricky conditions have necessitated $7bn in investment to improve its mines there. At first the payoff seemed worth it, especially given a surge in the price of cobalt, a by-product that was a mere afterthought when Glencore had first invested in 2007.

But just as production has been ramping up, the political landscape has worsened. Old agreements to freeze royalties paid by Glencore have been all but torn up by the government. Remitting profits abroad is harder. Under duress, in June Glencore wrote off $5.6bn it loaned to a joint venture with a government-owned miner, in exchange for equity. To add to its woes, in November cobalt at Kamoto was found to be contaminated with uranium. Sales are suspended until a plant to remediate the radiation can be built.

Yet even radioactivity is not Glencore’s biggest problem in Congo. Since first investing a decade ago, it has relied on a deep-seated alliance with Dan Gertler, a controversial Israeli businessman who started in the diamond trade. According to a UN report, after arriving in 1997 Mr Gertler won favour with the ruling Kabila family by offering $20m to finance the purchase of arms, which the current president’s father used to win a bloody civil war. That gained him a perch as an unavoidable middle man to just about anyone looking to dig something from the ground in Congo. Mr Gertler is said to be the inspiration for the film “Blood Diamond” (presumably not for the hero). Through a spokesman, Mr Gertler declined to comment but reiterated claims of having committed no impropriety.

American authorities now have Mr Gertler in their sights. Under “Global Magnitsky” sanctions first enforced to target Russian wrongdoing, in December 2017 he was among 13 kleptocrats and their cronies placed under sanction for egregious breaches of human rights and for corruption—a problem for Glencore, whose boss once described Mr Gertler as “a supportive shareholder” in a joint venture in Congo. It has found it hard to cut ties with him.

Glencore might have known from the outset of Mr Gertler’s sulphurous reputation. The UN report that outlines his past was written in 2001. In the wake of an American hedge fund facing scrutiny for allegedly dealing with him in 2016, before he was sanctioned, Glencore bought him out from its mines, including Kamoto, for $534m. But the deal entitled its erstwhile partner to further royalty payments in the region of over $20m this year and $100m in 2019. When Glencore at first refused to make these payments, citing the sanctions, Mr Gertler filed a lawsuit and, in essence, threatened to close down Glencore’s Congolese operations. Keen to avoid that outcome, Glencore decided to pay him.

Glencore has insisted it did not violate American sanctions, largely by means of having paid Mr Gertler his dues in euros, and outside America. It has made the case to American and Swiss authorities that penalising it would be tantamount to self-inflicted industrial sabotage: Congo is the source of two-thirds of the world’s cobalt, an element which is crucial to modern electronics (see article). If it were to leave the place, Glencore has argued, Chinese miners already active there would send ever-more precious cobalt straight to China (as Glencore itself often does, too).

Whatever its merits, this argument seems to have fallen on deaf ears. Three weeks after Glencore paid part of this year’s dues to Mr Gertler, on July 3rd, it announced it had received a subpoena from America’s Department of Justice (DOJ) in respect to compliance with the Foreign Corrupt Practices Act; its activities in Congo, as well as in Venezuela and Nigeria, were cited. Britain’s Serious Fraud Office is also reported to be investigating Glencore on matters relating to Congo, as is the Ontario securities regulator in Canada.

Who can succeed Ivan?

“Paying Gertler was a blatant finger in the eye of US authorities,” says a senior executive at a rival firm. “You can’t do that and hope to get away with it, even if you are Ivan Glasenberg.” Worse, the matter is not even fully resolved: Glencore has yet to publicly announce whether it intends to pay Mr Gertler the money he is entitled to in 2019 under existing agreements. (The company declined to comment.)

Glencore’s market value fell by $5bn on the news of the DOJ investigation—an amount more than five times greater than the biggest fine ever meted out under the relevant statute. That reflects investors’ fear not only of a large penalty, but also that American authorities could in effect force a change of direction at the company.

The miner is hardly unique in the corporate world in having faced the attention of American authorities. But Glencore’s case stands out. Other American investigations have mostly been against firms where the alleged wrongdoing was peripheral to their activities, where the top brass could blame underlings and where the problem was not seen as indicative of wider culture. Yet some analysts estimate that Congo, at least before its current woes, represented around a quarter of Glencore’s market value (now at $51bn). Mr Glasenberg is reported to be a regular visitor. And the DOJ investigation targets three countries, suggesting it is investigating a pattern of problems.

Analysts have fretted about Glencore itself coming under “secondary sanctions” for its relationship with Mr Gertler. That seems unlikely. But even the slightest whiff that Glencore is abetting sanctions-busting will jangle the nerves of the compliance department of its banks. Commodities trading is fuelled by ample and cheap bank financing; Glencore has $33bn in bonds and loans outstanding.

Mr Glasenberg has had to reassure analysts about this. “He knows that if banks start worrying about getting caught up in sanctions stuff just by doing business with Glencore, that would be a terminal issue,” says one. It was worried banks that pushed Mr Rich from his perch in 1993. Given its supportive shareholders—30% are Glencore employees, and the Qatari sovereign-wealth fund has a further 8.5%—the firm’s lenders are the most likely source of pressure on its business model.

Some industry executives worry that Glencore is turning mining into the new banking: a sector aggressively pursued by American authorities, with the power to dictate fresh faces at the top of firms they deem to fall short. “The DOJ worries about sectors that don’t take compliance seriously. Industries only wake up after one of them is hammered, like HSBC in Mexico,” says one industry figure. The bank’s money-laundering of cartel drug money earned it a $1.9bn fine in 2012, along with five years of intense monitoring, prompting wider change in the banking industry’s culture.

How and when the Glasenberg era ends is what investors are most curious about now. Aged 61, he has already started indicating to investors he won’t be around for more than three to five years—as it happens, roughly the time frame of a DOJ investigation of the scale Glencore faces. None of his lieutenants are in line for promotion; even in the gossipy world of mining, no one has any idea who will succeed him. Once, the obvious choice would have been a swashbuckling trader willing to win at all costs and to plough on in the face of criticism. Less so, now.

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