Glencore (LSE:GLEN) (Switzerland), one of the world’s largest mining and commodity trading companies, was the largest detractor from performance during the quarter and the past twelve months. Weaker than expected demand for copper in China has driven the price of the commodity lower and negatively impacted Glencore’s share price. Although both supply and demand determine an item’s price, we believe that copper’s steep cost curve means that if prices dip lower, supply will be rapidly cut back. This quick reduction in supply should protect us against continued price weakness. China’s copper consumption is still growing, and copper will likely be in deficit in the coming years. Shares have also been weak due to concerns about Glencore’s ability to service its debt. Management wanted to take decisive action to quell investors’ fears and decided to pay down debt via an equity offering of $2.5 billion, asset sales and a suspension of the dividend. We were comforted that Glencore management bought 22% of the new equity during the equity raise, a clear indication that management’s interests remain aligned with shareholders. This purchase allowed them to maintain their significant personal investment in the company. The management team and other employees own about one-third of Glencore’s stock, and CEO Ivan Glasenberg pledged not to sell shares while employed by the company. In our view, Glencore is uniquely positioned in its industry due to the management team’s entrepreneurial and value-focused approach to running the business. We believe Glencore’s business value balance of 70% mining operations and 30% commodities trading affords the company an unmatched knowledge of industry pricing and supply/demand dynamics.
From David Herro (Trades, Portfolio)'s Q3 Oakmark International Fund commentary.
