Commodities: overstated and under pressure
Glencore at a loss over DRC scandal
A disturbing disavowal of responsibility, especially given the other investigations to which Glencore is now subject
Precisely what motivated directors at Katanga Mining to overstate production and misrepresent financial statements is "hard to understand", Glencore CEO Ivan Glasenberg told shareholders at the company’s AGM last week.
It was an important question, not least because Katanga, the copper and cobalt operation in the Democratic Republic of Congo (DRC), is 75% owned by Glencore. And also because Glencore’s DRC business has been the central pillar in various global investigations — including by the US department of justice.
So it was not exactly a huge surprise that Glasenberg, the steely SA-born head of the commodities trading giant first started by trader Marc Rich in 1974, was grilled about this at last week’s AGM. That AGM in Switzerland, where Glencore is headquartered, stretched on for over an hour. And the DRC wasn’t the only topic: NGOs and labour also leapt at the opportunity to have their say about issues ranging from its sustained coal production to its deteriorating safety record.
Last to quiz Glencore directors was shareholder activist Theo Botha, who inquired why certain individuals at Katanga made "materially misleading disclosure" relating to the results of its operations.
Katanga trades separately from Glencore on the Toronto Stock Exchange.
In December last year, the Ontario Securities Commission approved a $22.5m settlement agreement with Katanga Mining and former members of its board for misleading disclosure and internal control failures.
The individual respondents were Glencore nominee directors on Katanga’s board: Aristotelis Mistakidis, Tim Henderson, and Liam Gallagher; as well as former CFOs Jacques Lubbe and Matthew Colwill, and former directors and CEOs Jeffrey Best and Johnny Blizzard.
In the settlement, Katanga admitted it had failed to maintain adequate internal controls over financial reporting and disclosure controls and procedures.
The individuals concerned admitted they engaged in conduct that resulted in Katanga making "materially misleading disclosure", including overstating copper production by $41.8m, as well as improperly capitalising impaired ore and overstated concentrate inventories totalling about $122m.
The individuals agreed to pay $4.7m in administrative penalties and have been barred from becoming officers or directors of a listed company for several years.
"Why did the respondents do this?" Botha asked. He pointed out that many of those people had, after all, been appointed to the Katanga board by Glencore. "Was the Glencore executive committee aware of this?" he asked.
Glencore chair Tony Hayward said he is not prepared to speculate on the reasons for their conduct. Glasenberg added that the head office is also in the dark.
"The reason they did it is hard to understand. The amounts are not significant for the Glencore group, as you can imagine looking at the numbers. But very hard to explain. Maybe performance. It’s hard ... I cannot get into their heads why this was done … I cannot sit here and analyse their real motivation."
It’s a disturbing disavowal of responsibility, especially given the other investigations to which Glencore is now subject.
There was more. According to the Ontario Securities Commission, certain members of Katanga management also got extra compensation, in the form of cash and equity, directly from Glencore — which was not previously disclosed.
Botha said Glencore, as the largest shareholder, should have ensured this disclosure was made. Yet, despite the fact that Glencore was centrally involved, Hayward said it is "not reasonable" to expect the Glencore remuneration committee to have done this. "It’s very reasonable to expect the remuneration committee of Katanga to have done so, and it has clearly failed in its fiduciary duty," he said.
Another disavowal of responsibility.
Glencore, however, says it has since implemented measures to strenghten processes and procedures at Katanga.
As part of the settlement, Katanga also admitted it had failed to disclose material risks to its business — specifically the elevated risk of public sector corruption in the DRC and its reliance on individuals and entities associated with the shadowy Israeli billionaire Dan Gertler.
Gertler, according to the US Treasury, is said to have amassed his wealth through opaque and corrupt mining and oil deals in the DRC, using his close friendship with former president Joseph Kabila to act as a middleman for mining asset sales in the country.
The Canadian settlement agreement says Katanga failed to disclose that it was instructed by Gécamines, the DRC’s state-owned mining company, to pay royalties to a Gertler associate instead of to the state entity itself.
The relationship with Gertler has caused a great deal of trouble for Glencore. Worse: Glencore is unable to cut ties with the businessman, as it is still contractually obliged to pay him royalties from its Mutanda copper mine.
And yet, Hayward said Glencore seeks to maintain a culture of ethical behaviour and compliance throughout the group. In response to the subpoena from the US justice department concerning its dealings in the DRC, Venezuela and Nigeria, Hayward said Glencore’s board has established an investigations committee which he chairs. This committee will report back in due course, he said. We wait with bated breath.