Commodities behemoth Glencore had more than R100bn of its market value wiped out on news that the US department of justice has subpoenaed it for documents under that country’s money laundering and anticorruption laws.
Glencore CEO Ivan Glasenberg took a knock of about R6.6bn to his net worth on the day. After Qatar’s sovereign wealth fund, Glasenberg, a South African-born billionaire, holds the largest equity stake in the company, which has plans to expand in SA.
The well-connected Glasenberg counts President Cyril Ramaphosa as one of his close associates, as Ramaphosa’s former investment vehicle, Shanduka, which has since merged with Pembani, is Glencore’s local empowerment partner on a number of mining projects.
Late on Monday, under the Foreign Corrupt Practices Act and US money laundering statutes, Glencore was ordered to hand over documents relating to its business in Nigeria, the Democratic Republic of Congo (DRC) and Venezuela, dating back to 2007. Glencore mines cobalt and copper in the DRC and is an exporter of Nigerian and Venezuelan oil.
Being at the centre of controversy is not unfamiliar territory for Glencore. The company has come under fire in SA for its role in a consortium that controversially bought 10-million barrels of the country’s strategic oil reserves at a bargain price of $28 a barrel in 2015.
On Tuesday, the share price dropped more than 14% to R54.94 at one stage. This was its lowest level since August 2017.
The price recovered slightly after American traders came online, closing 8.57% lower at R58.54. The drop in market value on the day was 2.5 times the size of its annual dividend paid in 2017.
In a note to investors, Credit Suisse analysts said that the market’s response was disproportionate as this was "a simple request for documents, rather than an announcement of a formal investigation".
The market reaction may have been compounded by other difficulties faced by Glencore in 2018, in particular seemingly separate allegations of corruption at its operations in the DRC and a potential investigation by the UK’s Serious Fraud Office (SFO).
Hunter Hillcoat, an analyst at Investec Bank, said he viewed the DRC operations as already entirely discounted, given Glencore’s share price had underperformed 14% compared to its peers. This has been the case since the first wave of negative DRC-related news hit in late January and which recently culminated in reports of a potential SFO bribery investigation into Glencore’s dealings with Israeli billionaire Dan Gertler, a close friend of the DRC’s President Joseph Kabila.
In December the US Treasury imposed sanctions against Gertler to block any assets he held in US jurisdictions. US department of justice fines could be large, said Hillcoat. The Royal Bank of Scotland and Barclays global financial crisis-related fines were $4.9bn and $2bn respectively, while HSBC was fined $1.9bn in 2012 for poor money laundering controls.
"But none of these is near the quantum of the market’s reaction in terms of Glencore’s valuation today. Uncertainty undermines conviction and the recent flow of negative news has created a lack of clarity around the company’s near-term earnings profile and valuation."
The Credit Suisse analysts said while there was "clearly a risk factor" with regards to the US subpoena, such requests were "more common than perhaps the aggressive drop in the Glencore share price today suggests". The analysts pointed to a six-year antibribery probe related to gifts paid to foreign government officials during the Summer Olympics in Beijing in 2008, which resulted in BHP Billiton paying $25m in the US.
Investigations by the US, UK and Australian authorities into Rio Tinto’s dealings in Guinea have been ongoing for a year.
Glencore said it was reviewing the subpoena and would provide further information in due course.
The last time the US department of justice subpoenaed the company for documents was in 1982. Thereafter, its founder, Marc Rich, fled to Switzerland and in the following year was indicted on 51 counts of tax evasion, fraud and racketeering. Rich lived his life as a fugitive from justice until he was controversially pardoned by then president Bill Clinton, hours before he left office in January 2001.
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