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4/28/11

A 26 segment × 3 exposure (78 frames in total)...Image via Wikipedia

Ivan Glasenberg, the chief executive of Glencore, was inspired to get into commodities trading when as a young man in South Africa he observed a trader in South Africa sourcing candle wax from South America and selling it to Japan. In 1984 Glasenberg landed a job at Marc Rich & Co. and caught the eye of legendary trader Rich when despite anti-Apartheid boycotts of South Africa he managed to find buyers for the country’s coal.

Rich–who famously made his first fortune trading oil for Iran–might have seen some of himself in Glasenberg. In a rare interview with a Swiss paper in January, Rich blessed Glasenberg’s plans for a Glencore IPO and said of his protege: “I liked him from the start. He is intelligent. He is analyzing well, he is very hard working, and he has impressive presence.”
Glasenberg did stints in Sydney, Hong Kong, Beijing, then landed at headquarters in Baar, Switzerland. In 1994 Rich’s traders bought out their (then U.S. tax fugitive) boss for $600 million and renamed the firm Glencore. Bill Clinton pardoned Rich in 2001. In 2002 Glencore’s traders elected Glasenberg chief executive.
To think that today Glasenberg is set to preside over Glencore’s $11 billion initial public offering at a price that values the company at more than $60 billion, or 100 times more than what they paid Rich.
This growth has come at a time when commodity prices have been on a tear. Oil, gold and iron ore have quadrupled in a decade; wheat has tripled; corn doubled. So will Glencore’s listing be just the froth on the crest of the commodities wave? Its 2010 earnings of $3.8 billion on record sales of $145 billion just a fluke?
Investing legend Jeremy Grantham of money manager GMO said in hisquarterly screed in late April that the only way commodities are not in a massive bubble is if the world is undergoing a China-driven Malthusian paradigm shift and is on the cusp of not only peak oil but peak everything. He thinks there’s at least a 25% chance that China is destined for a stumble and commodity prices set for a steep fall within a year.
Do you really want to take the other side of the trade if Glasenberg is selling? Maybe, maybe not. Glasenberg, 54, in a rare interview with Bloomberg in April, said, “Is it the top of the cycle? Who knows, who cares? We are only potentially selling out in five years’ time, so let’s worry about the market in five years’ time.”
Glasenberg (who will almost certainly become a paper billionaire with the IPO) has said he won’t sell a single share of Glencore while he’s still with the company. Most of the rest of the 500 partners with shares, including the top 65 execs who own 58%, will be locked from making their lucrative exits for a few years–during which time it will be in their interest to maximize growth.
How will they do it? There’s every reason to believe Glencore will continue with the core strategy adopted after Rich left: instead of just trading commodities the firm has backed into owning mines all over the world.
Glasenberg’s traders don’t just sit in front of screens. They’ve been described as “Moonies” and “androids” for their dedication to the firm and willingness to scour the globe for opportunities. Over the past decade they have acquired and consolidated dozens of mines, often spinning them off as public companies while keeping a big stake plus the rights to market the output. Glencore owns 74% of Congolese cobalt miner Katanga Mining. It has 71% of Australian nickel producer Minara Resources, 9% of Rusal Aluminum, 40% of Century Aluminum, and stakes in subsidiaries of Russian oil producer Russneft.
The company, in its initial filing (a complete prospectus is scheduled to be released May 4), says much of the cash raised will go to boosting its stake in Kazakhstan miner Kazzinc from 51% to 93%. As Glasenberg told the Financial Times in April, “We took the nice easy stuff first from Australia, we took it from the U.S., we went to South America … Now we have to go to the more remote places.”
But Glencore’s biggest public stake is in a mining company called Xstrata; its 34% is worth $24 billion. Glencore helped create Xstrata–selling it the coal mines that undergirded its 2002 IPO, and marketing much of its output ever since. Glasenberg has made no secret of his desire to acquire the rest of the company. Glencore’s recently departed chairman (and former ceo) Willy Strothotte remains chairman of Xstrata. With newly minted shares to use as currency in an acquisition, combining the firms is only a matter of time.
What else is coming? We can take some clues from the men who Glasenberg has newly selected to his board of directors. There’s new independent director Tony Hayward, former chief of BP, who will help advise on oil deals, especially those involving Glencore’s relationship with Russia’s Russneft. And newly appointed Chairman Simon Murray at first appeared to be a smart choice. Murray has spent the last 40 years in Hong Kong, as director of Hutchison Whampoa and most recently as founder and chairman of General Enterprise Management Services. He understands the Chinese, who are arguably Glencore’s most important customers. But Murray in late April enraged many with sexist comments, saying in a newpaper interview that women are “not so ambitious in business as men because they’ve better things to do. Quite often they like bringing up their children and all sorts of other things.” Not a good start, but Murray apologized and the gaffe might even help change Glencore’s macho culture.
As for whether or not you should buy shares in the new Glencore? Probably not. These guys are opportunistic traders: they can’t help but do everything in their power to buy low and sell high. With that in mind, better to get ahead of Glasenberg, and put some money into Xstrata.

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