A recent investment note by Canadian bank RBC Capital Markets will have made pleasant reading for Gary Nagle, CEO of Glencore since July. "The mining yield king" it parped enthusiastically of the mining firm.
"The company is extremely well positioned, with substantial cash flows, a balance sheet now at target leverage, a large asset streamlining process and the first signs of incremental growth from a variety of brownfield projects," the bank’s analysts said.
Expect this blushingly upbeat view of Glencore to be a common refrain, especially as the market absorbs its 2021 year-end numbers, which were scheduled for publication on February 15. Glencore is giving fresh legs to the diversified mining sector, which has been serving up some impressive free cash flow since about 2019.
Top of the list for investors will be the extent of Glencore’s commitment to buying back its own shares, unveiled as a strategic intention last year. If share repurchases are not especially generous this month — slightly disappointing fourth quarter production may cause Glencore to rein in the buy-back — expect a more aggressive approach in the current financial year, as well as improved cash dividends.
According to Jack O’Brien and Moomal Irfan, analysts for Goldman Sachs, Glencore could return as much as 70% of its market capitalisation by 2024. What’s setting the stage for this kind of return is tighter focus on net debt. In December, during its capital markets presentation, Glencore set itself a $10bn cap on net debt. It has reserved the right to exceed the cap should opportunity knock in the form of merger and acquisition activity, but the new net debt number is nonetheless a huge improvement on its previous net debt target of $16bn.
Repurchasing shares is an particularly confident move from Nagle & Co, as the company’s valuation improved 66% last year, outstripping BHP, Rio Tinto and even Anglo American — the golden child of the mining diversified space.
Part of the reason for the improvement in Glencore’s valuation is that the company is in sectoral catch-up mode. The group doesn’t own the iron ore or platinum group metals production that lifted the free cash flow of Rio Tinto and Anglo in the past few years. As a result, Glencore was the less preferred of the group.
As attention shifts to the future cash flows likely to be generated from battery metals, investor focus is beginning to change. However, there’s also an element of self-improvement in Glencore’s better share price, particularly in respect of "issues" that might be described as existential.
One has been the question of management succession. Nominating a new leader is often a lightning rod for all kinds of concerns about strategy change — more so when it’s Ivan Glasenberg, Glencore CEO for 19 years, who’s stepping aside. Glasenberg flagged his departure two years ago on the basis that it would give the market ample opportunity to digest the news. Yet such was the interest in the Glasenberg succession debate that it began to feature as a concern in analyst investment notes.
That worry proved unwarranted. Nagle not only drew largely from the Glasenberg playbook at his unveiling last year, he also sounded a bit like the old man extolling the virtues of organic growth over flashy M&A and production discipline.
No issue underlined strategic continuity more than Nagle’s view on thermal coal production. It’s worth pointing out that Glencore rivals BHP, South32 and Anglo American had uniformly exited the thermal coal sector. Nagle, however, stuck to Glasenberg’s notion that it was better to run down coal production responsibly than hand it to another where the trajectory of production was less certain.
The way was smoothed for Nagle after shareholders voted 94% in favour of Glencore’s strategy of responsible custodianship of thermal coal. Nagle then doubled down on coal, announcing mid-year the intention to purchase Anglo’s and BHP’s shares in Colombian thermal coal monster Cerrejón.
Because thermal coal prices shot through the roof in the second half of last year, Glencore’s energy coal strategy now has a pleasing dollar ring to it. Perhaps predictably, shareholders have also become less vocal about coal’s place in the Glencore portfolio, unless — of course — it’s to inquire where the price might go from here.
A third exogenous issue is one that continues to cling to the Glencore business case, albeit to a lesser degree than in the past. This is the investigation by antigraft institutions, including the UK’s Serious Fraud Office and the Department of Justice (DoJ) in the US, into allegations of irregular trading practices involving Glencore’s Venezuela and Africa commodities businesses.
Video evidence submitted in the Manhattan federal court in July by a former trader added colour to the investigations. It concerns allegations that in operating through third parties, Glencore had participated in unsavoury business practices.
In the case of Anthony Stimler, the group was connected with corrupt bidding for oil contracts with Nigeria’s state-owned company.
Glasenberg tended to steer clear of commenting on ongoing investigations. But last year Nagle opened up on the matter, saying that Glencore had abandoned third-party agents in its marketing division while committing to an improved battery of checks and controls.
Nonetheless, while the investigations continue there’s no knowing the extent of the sanction Glencore may eventually face. A calculation by New York bank Bernstein in 2019 indicated the market was factoring in a DoJ penalty upwards of $8bn — a number that Bernstein analyst Paul Gait considered completely out of whack with fines applied at the conclusion of similar investigations.
One of the other long-standing criticisms of Glencore has been the sheer reach of its footprint. One fun fact dating from its IPO in 2013 is that the group owned more merchant vessels in its marketing division than the UK’s Royal Navy had warships.
At the time, the marketing division was the source of confusion for analysts. Mining firms didn’t have anything quite like it then (they still don’t) and so back in 2013 issues such as how cash flow moved in the division was a novel problem.
The focus now on structural issues is Glencore’s so-called "tail assets": low-performing, short-life mines that were either too risky politically or suck up too much management time. Nagle has given particular attention to this. "We have certain assets in our business that are subscale," he said in December. "As we’ve grown and developed longer-life tier-one assets, some assets are not fit for purpose."
Ten "businesses" have been earmarked for sale, and as many as 15 more are being reviewed, both in terms of whether they offer the requisite scale and whether they generate sufficient returns. "In particular, we look for updates on the deconsolidated Agri business and the loss-making Koniambo nickel mine (exit increasingly likely)", said analysts at Deutsche Bank in a note. Cobar, a copper mine in Australia, is another that could be sold.
Since Nagle’s comments, Glencore has announced the sale of its Ernest Henry copper mine in Australia for A$1bn. Other Glencore divestments last year included its majority stake in the loss-making Mopani Copper Mines in Zambia, its Chad oilfields, the Karadeniz LPG terminal, zinc assets in Bolivia and the Enyo oil downstream business.
The sale process will generate proceeds for distribution, which builds Glencore’s yield play. Based on the sale of Ernest Henry, there is potential that Cobar could fetch $825m and Viterra, a grains handling business housed in the Agribusiness division, could attract bids of $6bn-$9bn, according to RBC Capital Markets.
The major consequence of stripping assets away is to focus more on the types of assets Glencore considers important. This may be its single-biggest investor drawcard. In DRC’s Mutanda, Glencore possesses a heavyweight producer of cobalt and copper. Mutanda is opening up the taps on production this year as Glencore sets about polishing its reputation as the premium battery metals producer.
Allied to this is a new stream of business that perhaps bears Nagle’s unique management stamp like no other to date. That’s Glencore’s increased participation in battery recycling through a series of joint ventures with downstream technology partners. One is in Morocco, with Managem, a metals recycling company. The aim is to produce about 1,200t of cobalt a year as well as specialised forms of lithium and nickel. Glencore announced a similar type of joint venture with Britishvolt, which will build the first battery recycling plant in the UK.
These are new, putative businesses set up to process the first wave of electric vehicle battery scrap, or "black mass", as it’s called. But more, larger waves will follow as upgraded generations of vehicles gain market penetration.
The joint ventures give Glencore a youthful, leading-edge look — though, to be fair to Glasenberg, embarking on first-mover, risky business ventures was pretty much his modus operandi.
And what of Glasenberg himself?
As the group’s single-largest shareholder, with a 9% stake, he continues to cast a long shadow over Glencore. At his final results presentation in July he made clear his intention to be an active shareholder, especially when it came to returns.
So far, his first year in retirement looks good, if RBC has got it right.
"We have added a $1.6bn buyback from mid-year 2022 and then an additional $4bn buyback in 2023," it said in its report.
"With about $11bn in free cash flow to distribute there is plenty to go around."
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