(Bloomberg) -- The bad news just keeps coming for Glencore (LON:GLEN) Plc -- this time out of Africa.
The commodities giant has had a tough few years, from corruption probes to getting caught up in the fallout from U.S. sanctions on Russia. This year, it’s been forced to watch from the sidelines a breathtaking rally in iron ore, a metal Glencore doesn’t produce at all, while rivals like BHP Group and Rio Tinto (LON:RIO) Group cash in.
The list of headaches got a little longer Wednesday, as the company warned it will take a $350 million hit to its fabled trading business when it reports first-half earnings next week, after prices for cobalt plunged. Glencore also signaled it’s likely to cut the target for copper production this year as it struggles with mines in the Democratic Republic of Congo.
Glencore has underperformed its major rivals this year, even after announcing bumper share buybacks. While other producers benefit from the rally in iron ore, the pressure on Glencore’s shares from probes by the U.S. Commodity Futures Trading Commission and Department of Justice has been compounded by a rout in prices for thermal coal, one of the company’s major profit drivers.
“With still no certainty on the DoJ investigation, a lack of momentum in operations, with lower coal prices eroding cash flows, the current discount in Glencore shares is likely to persist in the absence of more significant management action,” said Tyler Broda, an analyst at RBC Capital Markets. “The cobalt price drop continues to wreak havoc on the marketing books.”
Cobalt has quickly transformed from a star performer to a headache for the world’s biggest producer of the key battery ingredient. After quadrupling in two years, prices have now collapsed back to the lowest since 2016 as new supplies pour into the market. With few hedging tools available, that’s left Glencore exposed.
Excluding the cobalt loss, Glencore expects first-half trading profit of about $1.3 billion. It said previously that full-year profit for the unit would be toward the middle of its $2.2 billion to $3.2 billion long-term range.
Glencore has cut its cobalt sales in response to falling prices, but is still mining the metal from its African copper mines. The company said the loss from cobalt will be principally non-cash and described the inventories it’s holding as an “unrealised profit lag.” Effectively, the company’s marketing business has bought the cobalt from its mining unit, but has yet to sell it.
Read: Cobalt’s Drop to 2-Year Low Tarnishes Glencore’s Trading Jewel
The disappointing trading performance is a blow for Glencore, which has always said its traders can make money in any kind of market. The company touts the unit as a differentiator from other big miners, cushioning the ups and downs of the commodities cycle. The marketing unit deals in almost 100 raw materials including oil and agricultural products.
Last year’s trading profit was $2.4 billion, the lowest since 2013, with Glencore pointing to weak results from cobalt and alumina trades.
The cobalt losses aren’t Glencore’s only headache from its African copper business, which operates mines across the Democratic Republic of Congo and Zambia.
Glencore’s Katanga Mining Ltd. unit, where the company has taken tighter control after Canadian regulators fined and banned executives, is reviewing its mine plans and is likely to lower output expectations. Glencore’s Peter Freyberg, who has joined Katanga’s board, will discuss the turnaround plan at the company’s earnings next week.
“Our African copper business did not meet expected operational performance,” billionaire Chief Executive Officer Ivan Glasenberg said in a statement. “We have moved to address the challenges at Katanga with several management changes as well as overseeing a detailed operational review.”
While African copper is a relatively small part of Glencore’s overall business, the unit gets a disproportionate amount of interest from investors given both its role as one of the company’s key drivers of growth and a source of legal and operational risks.
When the company reports earnings next week, analysts are expecting sharply weaker results.
It’s been a different story for Glencore’s rivals this year. Even though Rio Tinto has struggled at its giant iron ore mines in the Pilbara, it’s been bailed out by the surge in prices and is expected to report a big jump in profits tomorrow. Anglo American (LON:AAL) Plc last week reported bumper earnings, driven by iron ore.
