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The Titan Rises From The Dead


Image source: Giphy.com

What's going on?

Glencore, the colossal mining company and commodities trader, is paying its shareholders a $1 billion cash payment (a.k.a. dividend) (tweet this)! It’s all part of its big turnaround from last year.

What does this mean?

Mining companies were in tough shape last year as commodity prices (e.g. copper and iron ore) sold off sharply. Glencore was in an especially tough position because it had a lot of debt: investors even worried that it might go bankrupt.

But over the past year, Glencore cut down on its massive debt by selling off some of its businesses for cash (like part-ownership of some of its mines). It also stopped paying dividends to its shareholders in order to hold on to more cash and help keep the company’s finances afloat (think: it hunkered down to weather the storm). This year, the prices of commodities have increased substantially, which has helped Glencore emerge from the storm with a much sunnier outlook – and now its shareholders are getting rewarded with a dividend.

Why should I care?

The bigger picture: China is key for big miners like Glencore.
Rising demand in China for commodities has largely been behind this year’s big rally in metals prices, much to the benefit of miners like Rio Tinto and Glencore. Some say that current prices are too high given China’s actual demand for commodities (i.e. what its factories need as opposed to what traders are buying in anticipation of prices going even higher). Predicting Chinese demand is difficult to say the least, but investors will be watching it closely.

For markets: Cutting debt is more important than paying shareholders when a business is struggling.
When Glencore announced it wouldn’t pay out dividends last year, some investors ran for the hills – the overall selloff in 2015 saw the value of the company’s shares cut by more than two-thirds in 2015. But it only suspended its dividends in order to pay off its high debt and stay in business. Now, Glencore’s share price has tripled from one year ago (much more than other miners who didn’t face as great a risk from debt). Investors who stuck around or bought shares when the company was struggling are now seeing their reward.

Originally posted as part of the Finimize daily email.

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