Glencore

Radiant-Glencore saga refuses to die down (another long article in today’s FT), with both firms alleging irregularities – that perhaps played a big role in the former going belly up.

Radiant and Sapphire say they have filed a roughly USD2bn lawsuit against Glencore in Singapore. Their argument is essentially that the relationship wasn't a normal arm's-length supplier/customer relationship: they claim Glencore acted as the "senior partner", influenced hiring, financing, trading decisions and payments, and effectively financed Radiant's expansion 

Yesterday, Glencore went much further. It formally stated that it has "confirmed evidence" that Radiant, Sapphire and associated companies sent financial institutions falsified invoices and contracts and fabricated emails purportedly from Glencore personnel.

While sentiment-wise it might have weighed on Glencore’s shares (other than softening sector-wide momentum), we believe that the increasing commodity market volatility (especially for oil) makes a case for buying the Swiss trading-mining giant on weakness.

Please also note that According to Bloomberg, Glencore and Infravia Capital Partners, and a few other US and Japanese firms (though names aren’t disclosed) are interested in buying a stake in Eramet’s lithium operations in Argentina. This should be good news for Eramet as there’s no tangible update on the firm’s €500m rights issuance – which might also have been hamstrung due to Duval family’s exit speculations.

Expert Opinion:
Financially, the known direct exposureto Radiant  looks containable. Bloomberg reported that Glencore provisioned about USD480m, essentially covering its net exposure: roughly USD951m owed to Glencore versus USD471m owed by Glencore. Of course, the USD2bn lawsuit would be more damaging, but such an outcome looks far-fetched at this stage. 

The valuation of Glencore looks fair to us, and considering those added risks, we see no reason to remain long, despite its intrinsic qualities (especially its trading business).

Rio Tinto is now our favorite stock within the sector.  The potential interest in Eramet's lithium asset is good news for Eramet, obviously, but is also a validation of Rio’s countercyclical moves to acquire various lithium assets close to the market bottom. Rio is probably the best play if you are bullish on the lithium recovery trade. 


For daily updates, subscribe to our newsletter and for detailed information, reach out to us at sales@alphavalue.eu