BARCLAYS: Glencore is in big trouble if copper gets $0.30 cheaper

Glencore is a strange hybrid company, both a commodities trader and a mining company, and it has a complicated balance sheet loaded up with different kinds of debt.

There are a lot of different ways to analyze the company but perhaps the best way to think of it is like a bank that's hitting a crisis, like Lehman Brothers.

That's what a team of Barclays' credit analysts, led by Darren Hook, did.

A bank in trouble might have a huge book of assets like mortgages and corporate loans that aren't making enough money to meet its debt obligations. For Glencore, the big issue is with mining, specifically copper mines.

While Glencore's copper mines aren't exactly jewels in the crown, it relies on a certain amount of cash flow from them.

And if the price of copper falls below $2/lb, you begin to get some seriously sweaty palms in Glencore's finance department as that revenue dries up. The price at the time of writing is $2.337.

Here's what Barlcays says (emphasis ours:)

This hinges on commodities prices not moving materially lower (we think copper below $2/lb raises risks considerably) and the banks continuing to provide financing.

Credit markets typically lead rating agencies in pricing ratings changes, but they are also susceptible to flashing false signals based on sentiment. At this point, assuming spot pricing, we think that GLEN.LN can retain investment grade ratings, even though the credit market clearly disagrees.

While Glencore's share price is crashing (currently down 83% from its 2011 IPO), it's the debt that really gets people worried.

This table from Barclays shows how Glencore's bonds would collapse in value if copper falls below that $2 mark.

This chart from Citi also shows just how closely Glencore's fortunes are tied up with the copper price:

Glencore has boosted its cash pile and, for now at least, its $6.5 billion (£4.3 billion) of bonds due next year look relatively safe, despite trading like junk.

Essentially, the Barclays team think Glencore debt is still worthy of the investment grade tag from credit rating companies as long as copper stays about $2/lb.

The bank argues that the market has gone overboard on dumping Glencore bonds, because they're trading at ranges that would look reasonable if copper fell to around $2, when it's currently about 15% higher than that.

It's a rare mispricing from a market, and a possible opportunity.