Glencore PLC A challenging economic backdrop – Adjusted EBITDA declined 32% to $5.6 billion

Glencore plc

Glencore PLC (LON: GLEN) has today provided its half year report 2019.

US$ millionH1 2019H1 2018Change %2018
Key statement of income and cash flows highlights2:    
Net income attributable to equity holders226       2,776         (92)3,408
Adjusted EBITDA       5,582       8,1801         (32) 15,767
Adjusted EBIT       2,229       5,0911         (56) 9,143
Earnings per share (Basic) (US$)        0.02        0.19         (89)0.24
Funds from operations (FFO)3◊       3,516       5,5661         (37) 11,595
Cash generated by operating activities before working capital changes       5,409       6,805         (21)13,210
Net purchase and sale of property, plant and equipment3       2,193       2,0551           7 4,899
US$ million30.06.201931.12.2018Change %
Key financial position highlights:              
Total assets     127,183     128,672          (1)
Net funding3◊      33,238      32,138           3
Net debt3◊      16,308      14,710          11
FFO to Net debt3,4◊       58.5%       78.8%         (26)
Net debt to Adjusted EBITDA4◊        1.24        0.93          33

Glencore’s Chief Executive Officer, Ivan Glasenberg, commented:

“Our performance in the first half reflected a challenging economic backdrop for our commodity mix, as well as operating and cost setbacks within our ramp-up/development assets. Adjusted EBITDA declined 32% to $5.6 billion.

“The rest of our business, however, remained strong and performed well. Excluding our African copper assets and Koniambo, our metals and coal industrial assets delivered robust Adjusted EBITDA mining margins◊ of 39%. In particular, our copper business, excluding African copper, recorded an EBITDA mining margin of 52% and a full unit cash cost of 72c/lb, while our coal business again generated margins in excess of $30/t, basis a $46/t thermal unit cash cost. Similarly, our marketing business is tracking towards the middle of our full year Adjusted EBIT guidance range of $2.2-$3.2 billion, after adjusting for some $350 million of non-cash cobalt losses reported in the first half.

“However, our African copper business did not meet expected operational performance. We have moved to address the challenges at Katanga and Mopani with several management changes as well as overseeing a detailed operational review, targeting multiple improvements to achieve consistent, cost-efficient production at design capacity. Our teams have identified a credible roadmap towards delivering on the significant cashflow generation potential of these assets, at targeted steady state production levels. At Mutanda, we are planning to transition the operation to temporary care and maintenance by year end, reflecting its reduced economic viability in the current market environment, primarily in response to low cobalt prices. We continue to progress studies on the sulphide project, having the potential to extend operations for many years, and anticipate being able to provide an update at our Investor Day in December.

“Looking ahead, we are confident that commodity fundamentals will move in our favour and that our diverse commodity portfolio will continue to play a key role in global growth and the transition to a low-carbon economy. Our asset teams are focussed on delivering the full potential of our business, which together with our promising range of commodities, should see us well positioned for the future. Through continued constructive collaboration, we remain focussed on creating sustainable long-term value for all stakeholders.”

1 Restated to present Glencore Agri on a basis consistent with its underlying IFRS treatment (equity accounting), previously proportionately accounted.

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2 Refer to basis of presentation on page 5 (found on the company website).

3 Refer to page 9.

4 H1 2019 and H1 2018 ratio based on last 12 months’ FFO and Adjusted EBITDA, refer to APMs section for reconciliation.

◊ Adjusted measures referred to as Alternative performance measures (APMs) which are not defined or specified under the requirements of International Financial Reporting Standards; refer to APMs section on page 66 for definition and reconciliations, to note 3 of the financial statements for reconciliation of Adjusted EBIT/EBITDA and to page 18 for reconciliations of Mining Margins.

Healthy cash generation despite significantly lower commodity prices

  • H1 2019 Adjusted EBITDA of $5.6 billion, down 32% ($5.9 billion, pre $350 million non-cash cobalt loss)
  • Net income attributable to equity holders down to $0.2 billion, mainly driven by lower average period-over-period commodity prices and impairment charges in our Chad oil and African copper portfolios
  • Cash generated by operating activities before working capital changes of $5.4 billion, down 21%
  • Net purchase and sale of property, plant and equipment of $2.2 billion, up 7%
  • Our ramp-up/development assets, comprising Copper Africa and Koniambo, weighed on earnings in H1 2019, with negative Adjusted EBITDA of $0.4 billion. These assets offer significant upside at steady state production levels.

Industry leading cost positions

  • First-half operational unit cash cost performance in our key commodities: copper (excluding African copper) 72c/lb, zinc 3c/lb (40c/lb ex-gold), nickel (excluding Koniambo) 329c/lb and thermal coal $46/t at a $32/t margin

Marketing a diversified earnings driver

  • Marketing Adjusted EBIT of $1.0 billion, down 35%, but only 13%, excluding a cobalt related loss on an ‘involuntary’ long cobalt position, against a particularly strong base period

Full year outlook factors…

  • On an annualised basis, pre-cobalt Marketing Adjusted EBIT of $1.3 billion tracking towards the middle of our $2.2-$3.2 billion long-term guidance range
  • Expected Industrial production weighted towards H2 for each of Copper, Zinc, Nickel, Coal and Oil
  • Extensive operational and cost improvement initiatives being undertaken at African Copper and Koniambo

…and balance sheet in strong shape for the medium term

  • Debt facilities renewed in March/April. Bond maturities continue to be capped at ~$3 billion in any given year
  • Although Net debt of $16.3 billion is at the upper end of our target range, on account of a new lease accounting standard,
    $1.1 billion of new lease liabilities were recognised during H1 2019, that previously would have been treated as operating leases
  • Conservative 1.24x Net debt/Adjusted EBITDA ratio. Intend to manage the balance sheet over the next 6-12 months towards our target of around 1x, in the current uncertain economic cycle backdrop
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