Glencore's business model has come back to haunt it

Glencore's astonishing collapse on Monday set it apart from other mining companies. Anglo American, Rio Tinto and BHP Billiton all tumbled too, but the scale of their decline was nowhere near as large.

They're all suffering from the dramatic downturn in commodity prices, but Glencore's exposure is comparatively enormous.

A note from analysts at investment bank Macquarie lays out an explanation for why their crash has been so much worse. The company's shares are down by more than three quarters since just five months ago, and have been cut in half over the last month alone.

Here's what happens to different companies' earnings and earnings per share when commodity prices move 10% either up or down - which is essentially a barometer of how conservative the business model is:

Glencore's earnings sensitivity to commodity prices is twice what Rio Tinto's is, and its earnings per share are more than four times as exposed.

In boom years, nobody complains about that - in fact, shareholders at Rio Tinto might be a little disappointed at the lower returns they see. But in a period of prolonged and largely unexpected commodity price weakness like the one the world is currently in, it's companies like Glencore that feel the heat.

Macquarie's analysts note that debt reduction plans announced just three weeks ago are no longer sufficient:

Should market conditions fail to improve, GLEN's credit metrics would sit on the margin of BBB band and place the credit rating at risk of a downgrade. Under these conditions, we estimate that at least ~ $4bn of additional debt reduction initiatives would need to be announced to reassure the ratings agencies and the market that GLEN is committed to defending its BBB rating.

And the worse spot commodity prices get, the deeper those debt reductions have to be. That means hacking away at investment projects and selling assets. Here's how much Glencore would have to flog just to break even if prices fell further:

My colleague Jim Edwards explained just how heavily indebted Glencore is, which is part of the reason that the company is so exposed to violent swings in commodity prices.

Two charts from an Investec note on Monday show just what that additional exposure means for the company's value. First, here's what BHP Billiton, another FTSE 100 mining giant, looks like if spot prices don't rise from here:

Investec's Hunter Hillcoat says that for BHP Billiton, "under this scenario there is no increase in value for shareholders, with debt holding steady at around one third of total value."

But that's quite different to the Glencore scenario:

For Glencore, Hillcoat says "Despite the drastic action that management has announced recently (even assuming all of the measures are successfully implemented), a spot price scenario results in an almost complete collapse in forward earnings such that no meaningful estimate of shareholder value can be derived... the company is solely working to repay debt obligations."

To be fair to Glencore, Hillcoat's analysis uses all of Glencore's debt rather than its "net debt," which is much lower. Net debt is the liabilities left over after the company has sold its highly liquid inventory, which Glencore believes functions like cash.

Nonetheless, Glencore's exposure was a choice, and something that served it well during its boom years. But the whole business model is about riding global commodity prices a little more than its peers - and that's a ride that goes down as well as up.