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Glencore's Glasenberg: Low sector margins due to US$1 trillion in industry CapEx over past decade

Miningcompanies must redefine "growth" to mean increases in earnings ratherthan production volumes if the sector is to recover from a US$1 trillion industrywidespending spree over the past decade, Ivan Glasenberg, CEO of Glencore Plc, told an audience May 10.

Speakingat an investment conference in Florida, the executive said the sector must acceptthat misallocated capital played a role in creating the sector's current woes, andthat "volume growth cannot be an end in itself."

Minersneeded to learn the lessons of 2003 to 2015, he said — capital allocation shouldbe more conservative, and executives should be more aware that volumes impact prices.

Massiveoverinvestment in new mines between 2003 and 2015 flooded the world with metalsjust as economic growth in the biggest metals buyer — China — started to slow down.

Accordingto Glasenberg's presentation, aluminum output increased by 110% over the period,iron ore supply increased by 80%, thermal and coking coal by 79%, copper by 47%and lead by 72%.

Thisgrowth in supply helped push metals prices down after 2012 and reduced mining companies'cash flows, earnings and margins.

The industry'scurrent level of profitability cannot sustain production levels in the long run,he said. Average industry margins, which peaked at about 65% in 2008, have now fallenbelow 10%, tracking the movement of metal prices.

But thereis hope for the future, he said.

Althoughdemand for iron and coal is expected to fall in 2016, Glasenberg said he expecteddemand for other base metals to increase. In fact, he expected a supply deficitto emerge in zinc, lead and nickel this year — demand for zinc will outstrip supplyin 2016 by about 400,000 tones, he said.

Switchingfocus to Glencore, where investors have pummeled the stock over concerns of highdebt levels and falling earnings, Glasenberg highlighted the company's program tocut down debt via and free cash flow, whilepointing out the company generates free cash flow of about US$3 billion even atcurrent low spot prices.

He isaiming to reduce net debt to between US$17 billion and US$18 billion by the endof the year, from US$25.9 billion at the end of 2015.

The companyalready realized US$2.6 billion in cash from the sale of a 40% stake in its agricultural business and thesale of the gold mine in Kazakhstan.Glasenberg also said he expected to raise another US$4 billion to US$5 billion infurther asset sales in the second half of the year, possibly including the copper mine in New SouthWales, Australia, and the LomasBayas copper mine in Chile.

He alsopointed out that the company's marketing business, which is expected to generatebetween US$2.4 billion and US$2.7 billion in earnings before interest in 2016, wasless sensitive to movements in metals price.