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On The Upcoming Glencore IPO: Is The Juice Worth The Squeeze?

Stone Street Advisors's picture




 

This article is from Stone Street Advisors.

Glencore is the most powerful, connected commodities trading firm on
the planet.  Since many valuable commodities are located in politically
unstable parts of the world, earning, and more importantly retaining
that honor necessitates that Glencore engage in some possibly
questionable business practices, some (many?) of which might just happen
to violate one or more international laws or sanctions.  Running such
operations as a private, closely-held firm based in a quiet corner of
Switzerland is hard enough, but doing so as a soon-to-be publicly-traded company in both London and Hong Kong may provide near impossible given the much higher visibility and scrutiny that comes with a public listing.

Joe Upsidetrader had a good post earlier this weekend
about how Glencore is like something out of a Tom Clancy spy novel. 
Other outlets have gone so far as to liken the firm to one or more evil
empire found in a Bond film.  Infamous must a firm be for it to earn
such impressive accolades, despite not only being a privately-held
off-shore firm (based in Zug, Switzerland), but almost completely off
the radar of Main Street (and even parts of Wall Street).

For the uninitiated among you, I strongly suggest you read this Business Week article from 2005, entitled "The Rich Boys," not for the wealth accumulated by its employees, but in honor of the Man, the Myth, the Legend, Marc Rich,
Glencore's founder and mentor extraordinaire.  If allegations of his
disregard for the law are even remotely true, then comparisons of Rich
and his cronies to an evil empire of Bond Villain-esque proportions are
not necessarily unfair.  Under-the-table deals with despots and
dictators, disregard for laws and according to some, a complete
disregard for ethical practices, all in the quest for dominance of the
global commodities trade.

But now, as the legacy of Glencore, nee
Marc Rich & Co AG, prepares its initial public offering, Wall Street
anxiously awaits its chance to get a piece of the most successful
commodities firm on the planet, and the riches that come with it. 
Seldom talked-about though is how those riches are procured.  Mining,
exploration, and extraction are not exactly pretty business, especially
when said business is in some of the most hostile locations in the
world, many rife with what amounts to little more than slave labor.

One
way or another, an incredibly wide swath of The Public is going to have
some economic exposure to a piece Glencore (both pre and post IPO).  I
doubt many pensioners and endowment beneficiaries, to say nothing of the
myriad mutual fund owners would be thrilled to know they're funding a
firm described by some as the most evil on Earth. If people are outraged
about Goldman Sachs' business practices, their heads would probably
explode if they knew even the half of Glencore's dirt.

Fund,
pension, and endowment managers and trustees should be asking themselves
whether they can in good faith support Glencore's IPO, not from a
socially responsible investing perspective, but from an economic one. 
Do they want to be left holding the bag when, after the IPO, some of
Glencore's less-proud tactics and practices result in potentially
enormous economic liability while insiders cash-out? (Glencore's CEO has said no partners will be selling shares in the IPO,
but that does not mean they won't at some point down the road)  For
their part, these insiders have to be asking themselves whether some
liquidity (ok, $10 billion is ALOT of liquidity!)  is worth the
heightened exposure and criticism.  Will the firm be able to deliver
such stellar results when they have not just every regulator and
politician in the world breathing down their neck, but the media, as
well?

Perhaps investors will view Glencore no-differently than any
other publicly-traded energy/commodity firm, and the concerns about the
Ways of Marc Rich are entirely overblown.  But on the other hand,
perhaps they are not.  As an investor, legal liability and the
uncertainties thereof should at the very-least give one pause before
piling-into the trade.  Glencore may be the best in the world at what it
does, and buying best-of-breed may often be a winning strategy, but
investors should be extremely wary of buying into a firm with such a
colorful history.  Given as-yet-"recovered" credit market conditions (at
least to full pre-crisis levels), and a global commodity price boom,
one cannot blame Glencore management for wanting to take advantage of
the opportunity to raise a not-insignificant amount of capital in the
equity markets.  As an investor, do you really want to be on the other
side of the trade from one of the most successful trading firms in this
history?

Caveat Emptor.

--The Analyst

Stone Street Advisors

 

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Sun, 04/17/2011 - 19:30 | 1178735 Coldfire
Coldfire's picture

Listing in Hong Kong instead of the US means that only 25% will be held by the public. So you retain control, get access to the public markets, and decide which assets to sell (hint: not necessarily the crown jewels). The only real public company with a primary listing in Hong Kong is HSBC, with an 85% public float. Yes, Glencore are masters of timing. Also of venue. As one of his last acts in office, Clinton pardoned Marc Rich for his tax crimes. However, Marc Rich will still not set foot in the US. Why? Because the presidential pardon did not relieve him of the obligation to pay his considerable back taxes. There are many other reasons not to list in the US, but this is a big one.

Sun, 04/17/2011 - 18:07 | 1178566 mcarthur
mcarthur's picture

Some of their assets are very uninspiring.  Who wants to be in the smelting business these days with China flooding the market with capacity driving down treatment charges for instance?  Most of the Canadian assets will run out of ore in the next 1-7 years; Kidd Creek, Brunswick, Matagami, Sudbury.  And the nickel business is heading for substantial oversupply which could drive prices down to $3-4/lb.  The zinc business is already in oversupply.  The mines in Mt. Isa Queensland are getting very tired.  etc.etc.

So this is the classic case of these guys in Zug realizing that three years from now, the magic is gone.  Trading is a mugs game.  This gives them time to cash out, demonstrate a couple of good years of returns for investors and then quietly disappear into the night.  And they are not listing on Wall St, by the way.

Mon, 04/18/2011 - 12:34 | 1180795 Stone Street Ad...
Stone Street Advisors's picture

Good comments, thanks.

Mon, 04/18/2011 - 12:35 | 1180809 Urban Redneck
Urban Redneck's picture

By the way, the public listing in HK also gives them the type of convertible currency that the Chinese government is interested in when granting domestic market access.   

Mon, 04/18/2011 - 12:24 | 1180766 Urban Redneck
Urban Redneck's picture

Three years from now, the magic is back on, the Glencore model is about seizing opportunity out of chaos.  Right now there isn't enough chaos, and there is too much dumb money chasing dead ends in EM which raises the opportunity cost.  That said it probably won't be Glencore that capitalizes on it, it will be a handful of younger guys who left Glencore to start their own (private) firm.  The trading side of the business can make money in either an up or down market, and by going public they become TBTF, although they actually already are.

Sun, 04/17/2011 - 17:00 | 1178468 Anonymous Youth
Anonymous Youth's picture

In a world in which capital is made freely available virtually without interest cost, it is difficult to imagine that the principal purpose of the Glencore IPO is to raise necesssary capital rather than to provide a public exit mechanism for its owners (albeit perhaps not immediately).  Although we now have level 1 transparency regarding the entities to which the Federal Reserve's generosity was extended, we do not (nor likely will we ever) have level 2 transparency, e.g., how many of those entities simply on-lent the funds they received from the Fed to traders such as Glencore.  One imagines that bankers around the world were tripping over themselves to expand their business with Glencore.  

Sun, 04/17/2011 - 16:53 | 1178455 ConfederateH
ConfederateH's picture

Most Americans love shooting broadsides at the Swiss almost as much as they do at the "joos".  In any case who are the Americans to cast aspersions at any other country about the purity of their capitalism.    It is far more likely that Glencore thrives without support from the Swiss than any equivalent US corporations do from their government, say Enron, ADM, or GE.

Sun, 04/17/2011 - 22:45 | 1179037 TemporalFlashback
TemporalFlashback's picture

Nothing about government support was mentioned above.

Mon, 04/18/2011 - 12:29 | 1180783 Stone Street Ad...
Stone Street Advisors's picture

That you.  I was wonder where that comment came from.  Seems some people have very serious cases of ADD.

Sun, 04/17/2011 - 16:29 | 1178424 mogul rider
mogul rider's picture

IMHO, Just like Blackstone, KKR, and other IPO's in 2007-08 this will be seen as the top.

Prepare accordingly

Parabolic ups, bring parabolic downs

They are clearly selling out a portion for a reason

Sun, 04/17/2011 - 16:20 | 1178416 Nassim
Nassim's picture

They are masters of timing. Are you?

Sun, 04/17/2011 - 16:01 | 1178381 AN0NYM0US
Sun, 04/17/2011 - 16:31 | 1178428 mogul rider
mogul rider's picture

You just fell off a turnip truck today?

 

United Fruit has been doing this for generations. Welcome to pleasure dome

Sun, 04/17/2011 - 21:16 | 1178902 AN0NYM0US
AN0NYM0US's picture

no not that, just hanging in the back alleys of ZH contributorland offering some pearls

good of you to repsond

Mon, 04/18/2011 - 06:38 | 1179480 Ted K
Ted K's picture

When they weren't discussing Democrats "evil conspiracies" against fruits, the catholics didn't have any updates on the thousands of child abuse cases across Europe and America and just about every other place known to man on "catholic.org" site have they???  Soon there won't even be 3rd world children the catholic church can rape, molest, and sodomize.  You think it's hard recruiting catholic priests now??? It's gonna be a bitch to find priests then.

Sun, 04/17/2011 - 16:04 | 1178377 AN0NYM0US
AN0NYM0US's picture

Guatemala

"Many remembered the tens of thousands who died..."

"People threw red carnations on the tomb of President Jacobo Arbenz, elected democratidcally but overthrown in a CIA-backed coup in 1956 when his plans for land reform riled the US based United Fruit Co. - triggering the civil war.

http://news.google.com/newspapers?id=ITRUAAAAIBAJ&sjid=fY4DAAAAIBAJ&pg=6...

Sun, 04/17/2011 - 15:51 | 1178373 cabernet
cabernet's picture

I think the timing of the Glencore IPO is very interesting. If the deflationists are to be right, this IPO could mark the top in commodity prices. Marc Rick is a clever guy, so he may know something we all do not. He could have taken Glencore public in 2007 at the last peak, but he did not. So why now?

heep://www.TheAngryGrapes.Com

Sun, 04/17/2011 - 15:11 | 1178297 AN0NYM0US
AN0NYM0US's picture

The Red Hand of Lundin
by Stephen Wittek

There were reports from some villages, north and south of Bentiu, such as Guk and Rik, that soldiers slit the throats of children and killed male prisoners who had been interrogated by hammering nails into their foreheads. In Panyejier last July, people had been crushed by tanks and strafed by helicopter gunships.”

"For now, the oil companies are untroubled by their role in the brutal destruction and displacement of civilians in the oil regions or by the fact that Khartoum is the sole beneficiary of all Sudanese revenue from oil pumped out of southern fields. Nor are they bothered by Khartoum’s declared intention to use oil revenue to purchase more lethal weaponry and create a domestic armaments industry. Three oil companies drilling in Sudan are on US exchanges and should be 'delisted'as soon as possible: Talisman Energy, PetroChina, and Lundin Oil.”

 

http://forgetmagazine.com/030802.htm

Sun, 04/17/2011 - 14:33 | 1178210 bruiserND
bruiserND's picture

How did this "stone street advisor " clown get back on ZH?

Sun, 04/17/2011 - 15:00 | 1178274 Stone Street Ad...
Stone Street Advisors's picture

Thanks for the constructive comment, really advancing the discussion, adding value, etc...

Sun, 04/17/2011 - 14:30 | 1178208 Sam Clemons
Sam Clemons's picture

If they are IPO'ing to unload to the public, does this mean that the "getting" is about as good as it is going to get in the realm of commodities trading?

Sun, 04/17/2011 - 15:08 | 1178284 Stone Street Ad...
Stone Street Advisors's picture

Glencore's CEO says partners aren't selling shares in the IPO.  I leave that to the reader to believe or not.  If that is the case, I wouldn't be surprised if while technically true, insiders aren't licking their chops to sell shares in the secondary market down the road.  Top-tick is entirely possible.  In times like these when VC's are doing series G rounds to cash-out insiders before IPO'ing to get their 100% IRR, it seems many are betting big on the validity of the 'greater-fool theory..."

Sun, 04/17/2011 - 15:00 | 1178273 Raynja
Raynja's picture

That was my first thought when i heard about this IPO. tickticktoptick

Sun, 04/17/2011 - 19:44 | 1178757 True.North
True.North's picture

Agreed, I view this similar to BX going public in the summer of 2007

Sun, 04/17/2011 - 14:01 | 1178111 simonsito
simonsito's picture

i guess they got some BP-/TEPCO-like dirt under the rug, and/or their businesses are on the verge of getting nationalized...

I mean, otherwise they would simply give away control on those huge cashflows, why would you do that?

Sun, 04/17/2011 - 15:22 | 1178319 Treason Season
Treason Season's picture

Apologies for OT and jumping the queue.



True Finns' Soini: EU Portugal bailout won't stay

HELSINKI, April 17 (Reuters) - The leader of the True Finns party said the EU bailout plan for Portugal will not survive, after Finland's anti-euro party showed strong gains in Sunday's general election.

http://www.reuters.com/article/2011/04/17/finland-election-forecast-idUSHEL01009320110417

Sun, 04/17/2011 - 15:34 | 1178344 Stone Street Ad...
Stone Street Advisors's picture

Come on, stay on topic.  If you want to rant about something unrelated, do so elsewhere.  Thanks.

Sun, 04/17/2011 - 21:09 | 1178887 Ted K
Ted K's picture

Implosion of European markets is pretty much related to everything, but then if you weren't so busy with talking Stone Street's book and self-promotion, you would know that.

Mon, 04/18/2011 - 12:26 | 1180773 Stone Street Ad...
Stone Street Advisors's picture

I have no position long or short in any firm at this time.  We disclose when we do.  Nice try, though.

Mon, 04/18/2011 - 03:27 | 1179382 egdeh orez
egdeh orez's picture

Come on guys... get a room.

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