Analysts’ views on diversified commodities miner and marketer Glencore have done a U-turn in the past three years as its basket of commodities has come back into favour and it has reduced its debt to manageable levels.
Glencore’s shares, now around R57 on the JSE, hit their nadir at R14.20 in September 2015 when investors were alarmed by its hefty US$30bn of debt, which prompted global ratings agency S&P to downgrade its outlook to negative. Though CEO Ivan Glasenberg had dismissed concerns about the debt levels as exaggerated, Glencore announced it would reduce borrowings by raising about $2.5bn in a new share issue, selling about $2bn of assets and suspending its dividend payments.
By the end of June this year, its net debt was down to $13.9bn and it was able to make the second $500m tranche, equivalent to $0.07/share, of a $1bn distribution to shareholders promised for the 2017 year. S&P has a BBB rating with a positive outlook on the group’s debt.
Among the commodities in Glencore’s basket, the average zinc price has gained 49% between the first half of this year and the first half of last year while cobalt has doubled and copper is up 22%.
Glencore’s adjusted earnings before interest and tax (ebit) from metals and minerals mining surged 286% while earnings from energy, which includes coal and oil production, turned from a loss of $589m to a profit of $809m on the back of higher coal prices and production. Adjusted ebit from agricultural products rose 86% on a 100% basis. Glencore sold a 50% interest in this division last year to two Canadian investment funds. The marketing division grew adjusted ebit 13% and Glencore has upgraded its earnings outlook for the full year by $100m to $2.4bn-$2.7bn.
Ian Rossouw, an equity analyst at Barclays in London, says perceptions that the quality of Glencore’s assets is inferior to its peers are hard to justify. Glencore has, among other things, the lowest coal and copper cash costs of the diversified miners. Its valuations are also attractive, for example the p:e ratio of the industrial business (excluding the marketing business) is 9.5 in 2017 and 9.1 in 2018, reflecting a 19% and 41% discount respectively to its peer group.
Rossouw says Glencore is Barclays’ top pick in the sector.
Glasenberg says business conditions have "normalised", allowing Glencore to resume capital-efficient merger and acquisition opportunities. Its latest deals include the purchase of additional stakes in Mutanda and Katanga copper mines in the Democratic Republic of Congo for $534m cash and a $2.55bn bid for Rio Tinto’s Hunter Valley coal mines. The original bid was unsuccessful but was followed by the formation of a joint venture with Yancoal, which will give Glencore a lesser stake in these mines for a $1.14bn investment.
Glasenberg says the commodities cycle is changing and key markets, such as China, are maturing. Glencore’s portfolio is best positioned among the diversified miners to take advantage of changing demand.
He believes global growth is the most synchronised it has been in the past six years and ongoing expansion in manufacturing capacity suggests trends will continue into the second half of this year.
If the global electric vehicle fleet grows in line with predictions, it means there will be 26m electric vehicles on the roads by 2030, from about 2m now, he says. The average battery will require 40kg-50kg of nickel, 5kg-15kg of cobalt and 50kg-75kg of copper, including for charging points and grid access.
Though mining shares have frequently disappointed investors, they can outperform the rest of the market at certain stages in the cycle. They are not yet too expensive and a diversified miner such as Glencore or BHP Billiton offers less risk than a single-commodity share.
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