Jim Chanos on Tesla and Glencore

Jim Chanos was on Bloomberg TV this week and shared his thoughts on recent developments in the markets.

I recommend to watch the whole thing here:

http://www.bloomberg.com/news/videos/2015-10-12/jim-chanos-explains-his-short-of-tesla-solarcity

His main point on Tesla was that it is much more difficult to become a profitable car manufacturer than be innovative, something which I also pointed out in my post a few months back:

(…)Red bull, an energy drink producer (!), decided a few years back to enter Formula one for marketing reasons. It hired the right people, has spent a meaningful amount of money and competes successfully with the likes of Ferrari and Mercedes ever since. No question, Red Bull’s execution was excellent, and good execution is rare. But, I reason that if Red Bull can dominate the most competitive racing series, building a single good car is doable (…)

Obviously, I fully agree with him. However, he also pointed out that BMW is already selling more electric cars in the US than Tesla, albeit smaller and cheaper ones.

If Tesla ever becomes a large-scale manufacturer of electric cars – as implied by its valuation – its returns are likely to be meager due to the absence of a true “moat”.

Chanos also indicated that he might be short Glencore, the troubled commodity trader.

http://www.bloomberg.com/news/videos/2015-10-12/jim-chanos-i-m-a-potential-purchaser-of-glencore

His main argument is that the company that used to be 20:80 (hard assets vs. trading) has basically become the opposite as a result of its Xstrata acquisition at the end of 2012 (at the top of the commodities boom)…

But it’s not just the changed business model that is worrying, Chanos expresses doubts about the company’s trading acumen now that Glencore tries to shed assets to generate cash for debt repayment. Chanos observes,

They were buying assets at the top and selling them after the crash, does this sound smart to you?

I have expressed my doubts about commodity traders acumen in the past and I have no doubt, given the lemming like behavior of most boardrooms, that other commodity traders suffer from equally bad judgement…

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2 comments

  1. “Trading acumen” is code word. They were able to get a multiple valuation much higher than the appropriate 1x and they bought real assets with it, although many XStrata mines were second tier. Their stock was their (overvalued) currency. It would have been lazy not to use it as long as the market/ investment banks were playing along.

    Would they be much better off now without XStrata? I bet their stock would still have fallen 80%.

    The real question now is restructuring/recap: it would be a very messy one with CoC clauses, derivatives to settle across the whole world, and traders walking down the elevators. I do not think creditors have the stomach for this …..

  2. Hubert,

    Not sure I buy that argument.
    If your stock/debt is 50 percent overvalued, but you are buying assets that are 100 percent overvalued it is still a very bad decision. The target valuation still matters for shareholders!
    It can be different for managment though: as the combined entity has higher assets/CF they can justify a higher salary/perks…

    If I am not mistaken they bought XSTRATA with 2/3 debt and the rest equity. Since they bought it at the top, it is reasonable to assume that the EV has fallen by more than 30 percent for a commodity producer. This means that the debt from the transaction has to be covered now by the equity from the trading business which thus becomes encumbered and lowers the opportunities there – I think they would be far better off having stuck to their core business…

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