Can investors reap rewards from Glencore?

By Ian Lyall for MailOnline
Updated: 10:54 EDT, 26 May 2011

In the end the bankers organising the Glencore International float succeeded in drumming up more than enough support for the listing.

Commodity rich: Glencore's Mopani copper mine

The issue was comfortably oversubscribed, while the middle-of-the-range 530p price tag for the shares suggests the company and its advisors haven't been too greedy.

At £36.7bn Glencore is London's largest ever float. In an instant it has turned hundreds of its traders into millionaires and a handful of the most senior managers into bnaires, including chief executive Ivan Glasenberg who is sitting on a paper fortune of £5.7bn.

The group sold around 16.9% of its shares to large international investors including the Abu Dhabi-based Abar Investments, the hedge fund Och-Ziff and the commodities investor Blackrock, raising £6.2bn in the process.

Excluded from the initial offering of stock, small investors can get in on the action as the shares are now officially quoted on the LSE.

Initially at least, demand for the newly minted Glencore stock is expected to be strong. That's because the company is being fast-tracked into the FTSE 100, so it is thought the tracker funds will be queuing to make their weighting in the shares.

Glencore is a commodities trader, in fact it is the world's largest commodities trader, which means it deals in all sorts of raw materials from wheat, corn and copper to zinc and oil, making sure it gets from field, mine or well to the end customer. Its network is so vast it controls 60% of the world zinc trade, 50% of the copper trade and 28% of the global coal trade.

Now it has been suggested the float has coincided with the top of the commodities cycle, which means its main markets are in decline and that savvy Glencore management, ever the traders, have spotted it is time to sell up and get out.

In reality employees are divesting only a small proportion of their shares, and in many cases they are doing so to cover tax liabilities suddenly accruing from becoming instant millionaires.

Boss Glasenberg has gone on record as saying he won't sell any shares as long as he is involved with the company. Sensibly, others have opted for a scheme that allows them to sell tranches of stock staged over the next five years.

The market won't be deluged by shares. To its critics Glencore is a vast money-making machine that operates under a veil of secrecy from its base in Zug, Switzerland, with little regard for the people or environment around it. In its listing document we got some insight into the inner workings of the firm and how it makes its money.

However the document also spelled out a series of worrying risk factors including 'expensive litigation, imposition of penalties and sanctions or suspension or revocation of permits and licenses'.

There are also geopolitical threats. Put simply some of its mines are in politically volatile areas of the world and could be closed or confiscated at the drop of a hat.

Investors must decide whether they are comfortable with these risks before buying the shares. Glencore listed among its reasons for floating the need for an acquisition currency. This means it can now issue shares and raise cash if it sees an opportunity it likes – which again is not exactly what would-be investors want to hear.

One deal already being touted is the £45bn takeover of the miner Xstrata, where Glencore is a 34.5% shareholder. Valuing Glencore is a difficult exercise as there is absolutely no other company like it quoted on the public markets.

Goldman Sachs was the last partnership to list, but comparisons here are tenuous. There is of course Noble Group, the Singapore-listed commodity trader. But it doesn't have all of Glencore's bells and whistles.

The UK-traded group also has stakes in a number of companies as well as owning extensive mining assets. City brokers estimate the trading business and these various investments are worth a collective £40bn – which is in line with Glencore's current stock market valuation.

OUR VERDICT: If these calculations are correct, then investors aren't exactly getting a bargain at around the float price of 530p. So there is no compelling reason to buy now.