Commodities group Glencore saw its share price plunge by around a third on Monday as concerns mounted over its ability to service its sky-high debts at a time when earnings are battered by low commodity prices.
The troubles at the company, which is one of the world's largest producers and traders of commodities, illustrate the dramatic changes sweeping through the industry as an economic slowdown in China weighs on the prices for metals and minerals.
In Glencore's case, the shares began dropping Monday after investment bank Investec Securities warned investors that the company may end up having to plow all its earnings into meeting its debt commitments if commodity prices, notably copper, don't start rising.
Investec analyst Hunter Hillcoat says Glencore is more exposed than rivals such as BHP Billiton and Rio Tinto because of the sheer size of its debt mountain, which stands at around $30 billion.
In a note to clients, Hillcoat warned that Glencore could end up "solely working to repay debt obligations" if commodity prices don't recover. Under such a scenario, Hillcoat said, the value of holding Glencore shares is "virtually eliminated."
That proposition prompted a savage sell-off of Glencore shares, which closed down 29 percent at 69 pence in London, slightly higher than the all-time low of 67 pence recorded earlier in the day, according to financial information provider FactSet.
Glencore, which was founded in 1974 by the late commodities trader Marc Rich, floated in 2011 at a share price of 530 pence, a listing that valued the company at a little less than 40 billion pounds ($60 billion) and made several of the company's executives, including CEO Ivan Glasenberg, billionaires.
A person close to Glencore, who spoke on condition of anonymity because he was not authorized to speak on the record, said Investec's analysis was "flawed" and noted that the company was on course to have free cash flow — what's left after debt payments — of around $3 billion this year at current market prices.
Sentiment toward Glencore PLC, which is headquartered in Switzerland, has been fragile for months as investors fretted over the impact of falling commodity prices on earnings and the company's ability to meet its debt repayments.
China's economic downturn is at the heart of Glencore's difficulties. Mining and commodities companies sought to take advantage of the country's booming growth at the turn of the decade, when many of the world's leading economies were struggling to emerge from the global financial crisis and ensuing recession.
According to Investec's Hillcoat, mining companies "gorged themselves on cheap debt in a race to grow production following the Chinese stimulus that occurred in the wake of the global financial crisis" and that the consequences of that "are only now coming home to roost, as mines take a long time to build."
Debt, said Hillcoat, "is fast becoming the most important consideration for mining company management."
Commodity prices, meanwhile, have dropped sharply in recent months. Copper, which is used in electronics and which Glencore is particularly exposed to, is trading near six-year lows.
Glencore is aware of its problems. Earlier this month, it announced a package of measures — from asset sales to suspending dividends and raising cash from new and existing shareholders — that it hopes will reduce debt by $10 billion.
But even if all that plays out as expected, Glencore will be left with a debt mountain of around $20 billion, which is still above its market value — after Monday's share price plunge, Glencore's value stands at about $15 billion.
Hillcoat said that Glencore may well — if the spot price environment doesn't improve — have "to undertake further restructuring beyond the dividend suspension, capital raising and asset sales programs it has already announced/implemented."
Copyright 2015 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.