Glencore Plc, one of the world's largest miners and commodity traders, took a roughly $480 million provision to cover its exposure to Radiant World. Radiant World is an iron ore trader under pressure because of concerns that it gave banks falsified documents.
People with knowledge of the matter say the provision essentially covers all of Glencore's remaining net exposure to Radiant World. They asked not to be identified because the details were private.
The numbers show how tangled the relationship became. Radiant World owes Glencore $951 million in total. Glencore also owes Radiant World $471 million. Together, those figures get close to the amount Glencore now expects to get back.
The Financial Times first reported those totals on Saturday, citing a letter that Radiant World sent to Glencore. People with knowledge of the matter verified the figures.
The totals also include the money Glencore had at risk with Sapphire Minmetals, another trading house that Glencore says is part of the same group. The chair of Sapphire Minmetals has rejected that claim and said the firms are independent.
Earlier this month, Glencore said its exposure to Radiant World was "well below" $500 million. The company uses $500 million as its materiality threshold.
In an earnings call, CEO Gary Nagle told investors that Glencore had stopped new business with Radiant World and was working to exit its remaining contracts. He also said Glencore had taken a provision, but he did not give a figure at that time.
Glencore had backed Radiant World heavily as the smaller company rose to become a leading global iron ore trader. Bloomberg has reported that Glencore often sat on the other side of Radiant World's deals. That trading routinely left Glencore with several hundred million dollars of exposure in many months. Late last year, Glencore secured warrants that could support a minority ownership position in Radius; those warrants have not been used.
The financial numbers are not the whole story. The Financial Times reported Saturday that Radiant World sent Glencore a letter threatening legal action over a dispute about financial obligations.
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The letter said the two companies had more than just a typical counterparty relationship, according to the FT. It said Glencore reviewed and approved the credentials of candidates for potential jobs, advised Radiant World on raising money, and recommended where it should set trade prices.
Glencore pushed back. In a statement, it said: "These claims are meritless and Glencore will strongly contest them. Glencore has incurred losses and been exposed to financial risks by Radiant's actions and will take appropriate action."
A spokesperson stated, "Our trading relationships with major consumers, including Glencore, were long standing, substantial and well documented over nearly two decades." The company added that Glencore had played a key role in facilitating financing tied to these deals and reaped significant rewards. Radiant has previously denied any wrongdoing and emphasized its commitment to ethical standards.
After the warnings of fake invoices, other financial institutions walked away. In late July, Bloomberg reported that major trading firms had stopped doing deals with Radiant due to concerns that it provided falsified documents to banks. Several banks either froze the trader's accounts or suspended its credit lines.
Large mining companies and Chinese buyers have also pulled back. Law enforcement investigations are underway, including by the U.S. Department of Justice and Singapore police. The proceedings do not necessarily result in criminal charges.
Bloomberg reported separately that the Justice Department contacted Glencore about Radiant World. Glencore spent months trying to reduce its potential losses before the situation escalated. Earlier this week, a person familiar with Glencore's thinking said the company had completely stopped working with Radiant World.
Although $480 million is below Glencore's $500 million materiality threshold, the failure is an embarrassment. It is especially awkward for the iron ore unit run by Peter Hill, whose marketing role covers steelmaking raw materials.
The loss amounts to roughly a quarter of that division's average annual EBIT over the past decade. In that division, iron ore is small compared with metals such as copper.
There is a broader lesson: a company can do many things right and one risky relationship can still hurt. The situation may not be over, because the legal fight and continuing investigations are still ongoing.
Investors in Glencore - or funds that own it - should pay attention to whether these allegations turn into lawsuits. The final loss could change, and a single relationship can still matter when it goes bad.
