Glencore at attractive levels but volatility very much a risk

23rd Sep 2015 11:39

(ShareCast News) - Tuesday's sell-off in Glencore shares left substantial implied upside in their price but recent elevated levels of volatility means investors should be wary.For those reasons, on Wednesday broker Investec upgraded its recommendation on the shares to 'hold' from 'sell', but no more.If commodity prices do not recover rapidly from their levels at present then the commodity trader's recent equity placing and cuts to dividends - which yielded $4.9bn - may be insufficient for "for the benefits of recovery to feed through to equity holders," analyst Marc Elliot said in a research note sent to clients.What's more, should current commodity prices stay at current levels then the company may need to adopt further measures to strengthen its balance sheet. Those would include asset sales ($2bn), working capital reductions (US$1.5bn) and other adjustments (US$1.8bn) just to keep its debt rating intact.The company needs to do that to make sure it can refinance the $12bn in debt maturing in 2017 "at a reasonable cost"."If the upturn doesn't come in 2016, then further dividend cuts and asset restructurings appear likely," Elliot added."Glencore remains the mining major most geared to a recovery in commodity prices. For investors anticipating the bottom will be seen in the next 6-12months, the current price level could prove an attractive entry point, but the downside risks also remain high. We stick with our 50:50 PER/NPV-based valuation, but now apply a 40% 'haircut' for risk, and move to Hold."