Glencore, which on Thursday formally announced its plans for an initial public offering, is drawing comparisons to Goldman Sachs.
But how similar are the global commodities trader and the global investment bank?
They’re both stalwarts in their respective industries. They’re both highly secretive about their businesses. And they’re both have corporate structures with influential partnerships at their cores.
The financial profiles aren’t all that different, either.
Glencore’s public offering could value the company at $60 billion. Recently trading at $160 a share, Goldman had a market capitalization of roughly $87 billion.
Glencore has the edge on revenue, notching $145 billion in 2010, an increase of 36 percent over the prior year. Goldman reported revenue of $39 billion in 2010, falling 13 percent from 2009. But Goldman is more profitable with net income of $8.3 billion, compared with $3.8 billion at Glencore.
Perhaps the most striking similarity is the timing of their respective initial public offerings. Glencore and Goldman both picked opportune moments to go public — that is when the market offered the best potential for peak pricing.
Goldman went public in May 1999. It was the middle of the dot-com boom when financial firms were generating enormous fees and profits from taking technology companies and other upstarts public.
The investment bank raised $3.7 billion from its I.P.O., then the second-largest debut ever after Conoco’s offering in 1998. Shares of Goldman jumped 33 percent on the first day of trading, to close at more than $70. The bubble burst a year later, and Goldman’s stock stumbled in the bear market that followed.
Glencore’s offering, which is expected to take place in May, comes when gold, metals and the like are booming. And it is a commodities bull market, as Goldman recently said, that may be nearing its end.
Glencore’s appetite for risk in commodities trading is bigger than that of leading Wall Street banks, according to information released by the banks underwriting the trading house’s multibillion-dollar flotation.
The banks’ reports in advance of Glencore’s initial public offering shed new light on the financial activities of the world’s largest commodities traders. Glencore’s risk appetite will be an important factor for investors weighing this month’s offering in London and Hong Kong.
The research reveals that Glencore could have lost a daily $42.5m last year on average when measured by the so-called “value-at-risk” measure, much more than the average $25.7m put at risk each day in 2010 in commodities trading by Goldman Sachs, Morgan Stanley, Barclays Capital and JPMorgan.
The four banks are the largest commodities dealers by revenues in the financial sector.
Daily value-at-risk (VAR) is a common industry yardstick used to measure potential losses. The gauge has its critics, as it measures potential losses on regular trading days, but does not capture unusual trading situations such as during a war or in a crisis.
Glencore told the nine banks behind its IPO syndicate that it had a $100m limit on VAR, but added that it had not exceeded that limit since at least January 2008.
The trading house’s VAR fell to $26.4m in 2009 after peaking in 2008 at $50.1m.
The higher risk-taking by Glencore is partly explained by the physical nature of its business, which makes price hedging difficult.
For example, it trades a large amount of Russian oil, but hedging instruments such as Brent and West Texas Intermediate futures reflect the cost of crude in Europe and the US.
The physical nature of the trading implies that Glencore’s VAR starts from a base of about $25m-$30m, according to people familiar with the trading house.
But the higher figure also reflects the fact that Glencore does speculate in the market from time to time.
“Price exposures are normally hedged,” Ephrem Ravi, lead analyst on Morgan Stanley’s report, wrote in a note for investors.
He added: “Nevertheless, the company sometimes engages in deliberate price exposures to leverage on the insight it has into certain commodity markets.”
Olivia Ker, lead analyst for UBS, cautioned that, although Glencore had a limit of $100m for its daily VAR, the company had not explained how it responded when it sustained a loss.
“If it is in the habit of reducing risk after a loss, then we can be confident that risk is well controlled,” Ms Ker wrote. “But, if Glencore is in the habit of sticking with exposure after a loss to back the original trade, then the risks are that larger losses may accrue over a period of days.”
The Swiss-based company is aiming to sell a stake of 15-20 per cent, worth up to $12.1bn.
The company is set to issue its prospectus, providing detailed information about its activities, later this week.