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31. July 2007

Glencore Parries Attacks on Secrecy as Debt Rises

The two truckloads of metal that rolled out of Glencore International AG's Mopani Copper Mines in Zambia in February never made it to their destination at the Indian Ocean port of Durban, South Africa. Hijackers got to the trucks first, overcoming both the drivers and the satellite tracking system designed to disable the vehicles remotely in the event of an emergency.

``It's a growing problem,'' says Shaun Sinden, general manager of ESO Trucking in Johannesburg, which has been moving minerals across Africa for 30 years. Glencore, the world's largest commodities trader, faces risks ranging from robbery to strikes to government confiscation. The closely held Baar, Switzerland-based company operates on six continents and produces and trades billions of dollars of oil, coal, metals and grain every day.

Glencore also owns a controlling stake in publicly traded Xstrata Plc, the world's fifth-biggest mining company by revenue, and 12 percent of Moscow-based United Co. Rusal, the biggest aluminum producer.

``Glencore is probably one of the best-run companies that, really, no one has ever heard of,'' says Phil Roantree, who helps manage 24.8 billion pounds ($50.4 billion), including Glencore debt, at New Star Asset Management in London.

Glencore was founded in 1974 by former fugitive financier Marc Rich, who sold out to the current owners in 1994. Rich was indicted in 1983 by U.S. Attorney and future New York City Mayor and presidential candidate Rudolph Giuliani for tax evasion and buying oil from Iran in violation of U.S. sanctions. He was pardoned in 2001 by President Bill Clinton, whose wife, Hillary, is also running for president.

Tin Mine Seized

Earlier this year, the 10,000 miners Glencore employs at Mopani went on strike to demand a pay raise. Around the same time, the Bolivian government seized a Glencore tin mine. In Russia, one of Glencore's partners in a $1 billion oil venture is under investigation for ``illegal business activity.'' And Glencore, after being accused in 2005 by a United Nations commission of paying ``illicit surcharges'' to Saddam Hussein for Iraqi oil in 2001-02, is awaiting the conclusion of a Swiss criminal investigation into such payments. The company denies any wrongdoing.

Glencore, which is now owned by a corps of senior executives, has, for most of its history, kept public disclosures to a minimum. As recently as 2003, its Web site consisted of a single page bearing its logo and address. Ivan Glasenberg, a coal trader under Rich who has been chief executive officer of Glencore since 2002, gave his last published interview -- to an industry publication called Metal Bulletin -- in 2003. He refused to allow any of his employees to be interviewed for this article and denied access to his trading floors and industrial plants.

Close to the Vest

``Glencore is a company that plays its cards close to its chest,'' says Jonathan Pitkanen, an analyst at Aviva Plc's Morley Fund Management Ltd. unit in London, which oversees 55 billion pounds in fixed-income assets, including Glencore debt. ``The fact that they don't give out that much information is a negative.''

The veil, however, is now lifting because Glencore is eager to secure its sources of metal, coal and oil by buying commodity producers -- and it is issuing debt to do so. Glencore has raised $6.5 billion in the bond markets since 1996, when it first sold debt, forcing it to disclose financial details to investors and rating companies.

Moody's Investors Service and Standard & Poor's both give Glencore bonds and bank loans their lowest investment-grade rating, citing the risks it takes in Russia, the company's continuing penchant for secrecy and the allocation of most of its earnings to a company profit-sharing plan that is a drain on cash flow. The profit-sharing plan now holds $12.6 billion, according to a May Glencore earnings report, up from $10.9 billion in 2006.

$116 Billion in Revenue

The fund has grown along with Glencore's profits. Net income in the first quarter surged 84 percent to $1.9 billion, according to the May report. Revenue in the quarter rose 21 percent to $30 billion. Net income for 2006 was $5.3 billion on sales of $116 billion. Glencore's annual profit has increased more than fivefold since Glasenberg, 50, took the helm five years ago.

Glencore -- the name is an abbreviation of ''global energy commodity resources'' -- has 2,000 employees in 50 offices in more than 40 countries, according to the company's Web site. Most of them work out of Glencore's trading offices in Baar, Switzerland; London; Singapore; and Stamford, Connecticut. Its Baar headquarters is in the Swiss canton of Zug, home to many global commodity companies taking advantage of the canton's low taxes and Swiss secrecy laws.

50,000 Workers

Glencore's industrial subsidiaries employ 50,000 people in 14 countries, according to a February presentation to prospective bond buyers. In addition, the company operates more than 100 ships and runs 50 oil tank farms worldwide. Glencore says on its Web site that 3 percent of the world's oil is sold by its traders. Customers for its metals include Sony Corp., the world's largest video-game console maker, and Volkswagen AG, Europe's biggest carmaker.

The fact that Glencore is a private company allows it to make fast trading and acquisition decisions. ``They don't spend much time in shareholder meetings,'' says Morgan Stanley CEO John Mack. ``They spend their time doing business. They can move very quickly with zero bureaucracy.'' Mack, 62, has known South African-born Glasenberg since Mack was CEO of Zurich-based Credit Suisse Group from 2001 to '04.

Last year, Glencore formed a commodity derivatives trading unit with Credit Suisse, through which the two firms are trading oil and metals futures contracts.

Youth Corps

The executive team under Glasenberg is notable for its youth. Chief Financial Officer Steven Kalmin is 36 and joined the company in 1999. The co-heads of the aluminum division, Steven Blumgart and Gary Fegel, are both 34. The oil unit is run by Alex Beard, 39.

``The management at Glencore are among the most savvy and intelligent people around,'' says Dwight Anderson, 40, founder of Ospraie Management LLC, a $7 billion commodities hedge fund in New York that trades in the same markets as Glencore. ``They have a culture that doesn't put up with mediocrity.''

Glencore doesn't take job applications for senior positions. ``They tend to grow their own talent, and all are steeped in the shared corporate culture,'' says David Sassoon, who worked with Glencore Chairman Willy Strothotte as a metals trader in the 1970s and now runs Chempro, a metals company in Lucerne, Switzerland. ``On the occasions where executives leave or retire, the replacement appears to be conducted with the minimum of fuss, and the business appears to continue to hum along.''

Grueling Schedules

Former employees say Glencore traders maintain a grueling schedule, traveling constantly to every corner of the globe, organizing shiploads of metals and tanker fleets of oil. When they're not traveling, they're on their BlackBerries at all hours, negotiating prices and moving shipments from one location to another, says one former Glencore trader who now runs his own commodities firm and who can't be identified because he signed a confidentiality agreement when he left Glencore.

Another ex-Glencore trader says that the long days and constant pressure to do deals drove him out of Glencore in the early 1990s at the age of 40.

For a decade, Glencore's top priority has been to buy up assets to use in trading. It has spent $10 billion on acquisitions since 1995 and has been especially busy in the past year. In August 2006, it paid an undisclosed amount for a 51 percent stake in a 75,000-barrel-a-day oil refinery in Colombia. Colombian partner Ecopetrol SA said in April that it would invest $2 billion in the plant along with Glencore to double production. The price of crude oil has almost tripled in the past five years and traded at $76.67 a barrel on the New York Mercantile Exchange today.

From Russia to Congo

In March, Glencore agreed to merge its aluminum assets in Russia with those of OAO Russian Aluminium and OAO Sual Group, forming United Co. Rusal, which is headed by Russian billionaire Oleg Deripaska.

In June, Glencore paid 150 million pounds for 25 million shares, or 12 percent, of Nikanor Plc, a London-listed company that owns and plans to rehabilitate an abandoned mine in the Congo. Glencore agreed to buy all of the mine's copper and cobalt.

Glencore's sister company, Zug-based Xstrata, which mines coal, copper, gold, vanadium, zinc and other metals in 18 countries, has also been on a buying spree. In the past four years, Xstrata has spent $30.7 billion on acquisitions. Its biggest purchase: $18 billion to acquire Canadian nickel-mining company Falconbridge Ltd. last year.

Glencore holds a 34 percent stake in Xstrata, worth $20.6 billion as of July 27. Glencore Chairman Strothotte, 63, is also chairman of Xstrata, and Glasenberg is a member of Xstrata's board. Xstrata CEO Mick Davis, 49, was a lecturer at the University of the Witwatersrand in Johannesburg when Glasenberg was a student there in the 1970s.

Political Risk

Xstrata's stock has risen five-fold in value since its 2002 initial public offering in London. On July 27 it closed at 3,077 pence, up 21 percent this year.

In 2004 Standard & Poor's lowered Glencore's corporate credit and bank loan rating one level to BBB-, the lowest investment grade, citing political risk the company had taken in Russia as one reason. Moody's also gives Glencore debt its lowest investment-grade rating, Baa3. In a March report, Moody's said it wanted to see more transparency in Glencore's financial reporting.

After taking a new look at Glencore in September 2006, S&P refused to raise its rating, saying one factor was the company's ``aggressive'' profit-sharing plan, which awards most profits to the approximately 450 employees with an equity stake in the company.

Under that program, 85 percent of net income is allocated to the owners, according to a March presentation to bondholders. Glencore's top 12 managers own 31 percent of the $12.6 billion fund, with none holding more than 10 percent. The rest is held by other managers.

$325 Million Payout

If they left the company today, each of the top executives would walk away with an average of $325 million, while Glencore's other owners would bank an average of about $20 million. Employees receive the payments over five years after leaving the company.

On July 3, S&P revised its outlook for Glencore to ``positive'' from ``stable'' without raising its rating. It cited improved transparency, high metal prices and record Glencore cash flow of more than $1 billion in the first quarter as reasons for the revision, and said there would be a possibility of raising Glencore's debt rating by one level ``in the near term.''

Xstrata has net debt of $13.6 billion, according to the company's financial filings, equal to 21 percent of its market capitalization. That compares with a ratio of 4.6 percent for Australia's BHP Billiton Ltd., the world's largest miner, and 3.7 percent for South Africa's Anglo American Plc, the second biggest, according to data compiled by Bloomberg.

`More Aggressive'

``It's been more aggressive in M&A than other companies,'' says Alex Herbert, an analyst at Standard & Poor's in London. S&P gives Xstrata debt a BBB+ credit rating, the third-lowest investment grade.

Investors who buy Glencore debt earn a healthy risk premium. The 850 million euros ($1.17 billion) in 5.25 percent notes that Glencore issued in October 2006 sold at a premium of 169 basis points over the German bund maturing July 4, 2013, a benchmark for European debt. The spread had narrowed to 92 by June 6; as of July 11 it was 124 basis points. (A basis point is 0.01 percentage point.)

Companies with similar triple-B ratings yielded 77 basis points over government debt on July 11, according to an index compiled by JPMorgan Chase & Co.

``I have been very happy with the performance of Glencore's bonds,'' says Cornel Bruhin, senior portfolio manager at Zurich- based investment house Clariden Leu AG, which oversees 128 billion Swiss francs ($104 billion), including Glencore bonds. ``In the past, you did not find many companies in the investment-grade world offering such a high spread.''

Bonds Oversubscribed

In February, after a road show that took Glasenberg and Kalmin to three British cities, Glencore sold 650 million pounds of 12-year bonds with a coupon of 6.5 percent, 175 basis points over U.K. government debt with a similar maturity. The bonds were 11 times oversubscribed.

Xstrata stock, meanwhile, has a ``buy'' rating from 14 of 21 equity analysts tracked by Bloomberg. ``At current commodity prices, Xstrata's cash flow is huge, and that net debt is shrinking rapidly,'' says Nick Hatch, an analyst at Investec Securities in London. ``People are not concerned about it.''

Glencore started life 33 years ago as Marc Rich & Co., founded by Rich after he spent 21 years working for Philipp Brothers, then the world's biggest commodities trader. Within a few years of its founding, Marc Rich & Co. was vying with Philipp Brothers for the rank of top commodities trader, according to The Story of Metal Trading, a 2003 book by traders Helmut and Peter Waszkis (Metal Bulletin, 296 pages, 24.95 pounds). Philipp Brothers, renamed Phibro, is now the commodities-trading unit of Citigroup Inc.

Marc Rich's Company

Rich, 72, fled to Switzerland after his 1983 indictment and was never tried. Two companies associated with him that were also indicted pleaded guilty to tax charges and racketeering and paid $200 million in fines, according to Rich's Web site.

Rich continued trading from his base in Zug until he sold his company for an undisclosed amount to its senior traders in 1994, according to Rich's Web site. He went on to found a new company, Marc Rich Holding GmbH, through which he now invests in real estate and hedge funds.

Rich's immediate successor was Strothotte, one of his company's top metals traders, who joined Marc Rich & Co. in 1978 after working in Germany for trading firm Frank & Schulte. Under the new name Glencore, Strothotte began the process of converting the company from a pure trading organization into the multinational industrial corporation it is today.

Producers and Traders

``Owning assets enables Glencore to see the whole production chain,'' says Ian Hannam, London-based managing director of capital markets at JPMorgan Cazenove Ltd., which is a banker to Glencore and advised on Xstrata's IPO. ``It gives them a clear view of supply and demand across the commodity markets. The information they obtain in real time, on the ground, gives them a strategic advantage.''

Glasenberg took over as CEO in 2002. Former colleagues and acquaintances describe him as an intense worker and demanding boss. Morgan Stanley's Mack says Glasenberg travels extensively to examine the company's mines and other facilities and to talk to customers. ``Ivan is very aggressive and understands the commodities business better than anyone I have ever met,'' Mack says. ``He's a hands-on manager. He doesn't have the number three, four or five person going down into Africa. He goes himself.''

Glasenberg, who was once a competitive walker, and who completed two Swiss triathlons at the age of 43, graduated in 1981 from the University of the Witwatersrand with a degree in accounting. He earned his accounting certification at Levitt Kirson, a firm in the South African capital.

`Extremely Loyal'

``He was the best in his year,'' says Len Furman, a managing partner at Levitt Kirson who trained Glasenberg. ``He was studious, extremely loyal and took his job very seriously. He would have become a partner had he stayed.''

Glasenberg moved on to the University of Southern California, where he earned a master of business administration degree in 1983. The following year, he joined Marc Rich & Co, working in the company's coal department in South Africa for three years and in Australia for two. He moved to Asia in 1989, where he managed the company's Hong Kong and Beijing offices. He became head of the coal department two years later.

``He got to the top by merit,'' says Graham Beck, the 77- year-old founder of Johannesburg-based coal-mining company Kangra Coal Ltd., a Glencore customer when Glasenberg started out as a coal trader. ``He developed good relationships with people; he understood them. Relationships are key in this business.''

The Xstrata Connection

Glasenberg has stepped up the aggressive acquisition program started by Strothotte, both at Glencore and Xstrata, which is a key part of Glencore's global supply chain. Glencore has a 20-year contract with Xstrata to buy coal from its Australian and South African mines.

Glencore also buys Xstrata-produced ferrochrome and vanadium, both materials used in the production of steel. And after Xstrata bought Falconbridge, Glencore contracted to buy nickel and cobalt from the former Canadian company's mines.

Glencore has recently learned about the risks of owning its own production in Russia. In 2005, the company bought stakes in several units of OAO Russneft for $972 million, according to an August 2006 bond prospectus. Glencore also loaned Russneft, Russia's seventh-largest oil company, $554 million, which was to be repaid via the company's cash flow.

Trouble in Russia

Russneft is controlled by billionaire Mikhail Gutseriev, who founded it in 2002. In June, the Moscow Arbitration Court froze Russneft shares, which are unlisted, pending a request by the Russian Federal Tax Service to have some of the company's stock confiscated, according to court spokeswoman Maria Raben.

In November, prosecutors filed criminal cases against managers of three Russneft units for illegally exceeding a government oil production quota, according to Interior Ministry spokeswoman Irina Dudukina.

All of this puts Glencore's interests at risk, says Mikhail Galkin, head of fixed-income research at MDM Bank in Moscow, which tracks Russneft's bonds. ``There is reason for Glencore to be concerned,'' Galkin says. ``Any tax claims with regard to Russneft's units will negatively affect Glencore's equity and debt interests in Russneft.''

Mikhail Khodorkovsky, CEO of OAO Yukos Oil Co., was convicted of tax violations in 2005, after which the Russian government auctioned off his company, with most of it bought by state- controlled OAO Rosneft and OAO Gazprom.

Emerging Market Risk

Galkin predicts that if Russneft's assets are sold, investors such as Glencore will be compensated. ``It's against the government's interest to inflict damage on outside investors,'' he says.

The nightmare Glencore worries about in Russia has already happened in Bolivia, where the government seized a Glencore tin mine earlier this year, with President Evo Morales saying the Swiss company had underpaid for it. Glencore, with the help of the Swiss government, is negotiating to get the mine back. Meanwhile, in April, Glencore won an auction to buy tin produced at the mine.

``What happened there happens in many emerging markets,'' says Daniel Linsker, an analyst at Control Risks Group, a London- based firm that advises companies on security and political dangers. ``The government is happy to give concessions to companies to attract investment when commodity prices are low. When prices rise, those in power then accuse those companies of foreign exploitation.''

At home in Switzerland, Glencore executives await a conclusion to the criminal probe stemming from the report of the Volcker commission, formally called the Independent Inquiry Committee into the United Nations Oil-for-Food Program. The commission was headed by former U.S. Federal Reserve Chairman Paul Volcker, 79.

Cited by Volcker Report

Jeannette Balmer, a spokeswoman for the Office of the Attorney General of Switzerland in Bern, says 33 companies are being investigated for making payments to the Iraqi government in violation of UN sanctions. Balmer refuses to name them, citing Swiss secrecy laws.

The 2005 Volcker report names Glencore as one of four oil- trading companies that acceded to Saddam Hussein's demand that surcharges be paid, in violation of sanctions, for access to its oil riches. A separate report in 2004 by the U.S. Central Intelligence Agency says Glencore paid a total of $3.2 million in surcharges.

``All four traders had some of the surcharges paid to Iraqi- controlled bank accounts through other agents and entities,'' the Volcker report says.

In a written response to questions from Bloomberg News, Glencore says, ``With the exception of formally authorized contacts for the execution of oil shipments under the approved UN oil-for-food program, Glencore had no contact with the Iraqi government or government officials.''

Improved Transparency

During the past several years, Glencore has acted more than ever like a publicly traded company. A person familiar with the company says it has even considered selling stock to the public. The bond prospectuses the company has issued since 2003 give an unprecedented amount of data on revenues, profits and Glencore's many partnerships with commodity producers. Glencore executives now meet with credit analysts.

Glasenberg has also tried to satisfy the rating companies on the question of Glencore's profit-sharing program. In 2004, he agreed to subordinate employee payouts to the debt owed bondholders in the event of a default. In March, the company announced that 10 percent of the payments from the profit-sharing fund would be in the form of a hybrid security, which combines features of debt and equity and which stretches payments for those who leave with an equity interest in the company over a longer period.

``The hybrid is definitely a step in the right direction for the company,'' says Felix Freund, a fund manager at Frankfurt- based Union Investment GmbH, which oversees 140 billion euros and holds Glencore's debt. ``It has given us more comfort.''

It could also undermine one of the keys to Glencore's success: the motivation of the hundreds of young traders eager to make their first $20 million before they are 40 and pursue a less- hectic life elsewhere.

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