Last year was quite the ride for Glencore CEO Gary Nagle. In his first full year in charge since taking over from Ivan Glasenberg, Glencore made global headlines for mainly the wrong reasons — such as corruption penalties totalling more than $1.2bn.
But it also enjoyed a blistering 80% rally in its share price. Though there may be more legal fallout if US and UK authorities press for individual prosecutions, it’s clear a line has been drawn under an affair that has squatted on the share for years.
What’s interesting about Glencore, however, is that analysts think there’s more upside even after the recent price run. “The company has the ability to sustain its free cash flow yield even as energy markets normalise,” says Goldman Sachs. It thinks coal cash flows will be replaced by rising copper cash flows — a view shared by Jefferies and Barclays. And “we remain buyers”, say analysts at Deutsche Bank.
There are two perspectives on Glencore’s investment outlook. Short term, there’s a tasty $7.5bn in capital returns due to be paid next month when Glencore unveils year-end results for financial 2022. For 2023, a total capital return of about $14bn has been forecast, of which $9.3bn will be in dividends and the balance in a share buyback programme.
Yet Glencore shares may “struggle” in the short term. As China reopens from its crippling Covid lockdown regime of last year, investors may decide to rotate into firms “with greater cyclical leverage”, says Deutsche.
It’s the long-term aspect of Glencore’s investment thesis that seems to set it apart from its peer group
But it’s the long-term aspect of Glencore’s investment thesis that seems to set it apart from its peer group. Its 110Mt in annual coal production will continue to drive the company this year. Even though thermal coal prices may ease, the fuel is expected to account for just over half of 2023 earnings before interest, tax, depreciation and amortisation (ebitda) of $28.7bn, assuming current spot prices.
Also, from a long-term perspective, there’s Glencore’s marketing division. No mining business has the countercyclical heft of its aggressive traders, who sometimes buy and sell coal shipments several times during a single delivery voyage.
Third, Glencore is the world’s largest producer of base metals. Demand for these is expected to grow exponentially in line with production of battery-driven vehicles and renewable energy applications. The world “doesn’t get it”, Nagle said at an investor day recently. “It doesn’t understand that there’s a [huge] deficit coming.”
The world ... doesn’t understand that there’s a huge deficit coming
— Gary Nagle
He forecast 100Mt in new copper demand to 2030 of which 76Mt would be for power grid expansions and 19Mt for electric vehicles. This would lead to a vastly undersupplied copper market equal to a cumulative annual shortfall of 50Mt. While the cure for high prices is high prices, as the old adage goes, a copper price of about $15,000 a ton would be required to balance the market, Nagle believes.
This compares with the current price of about $8,900 a ton — an increase of nearly 70%. “We agree,” says Christopher LaFemina, an analyst for Jefferies. “This copper price outlook is not reflected in the copper mining equities today.”
As a consequence Glencore is prepared to announce new brownfield projects and acquisitions, and — if the copper market conforms to expectations — even a greenfields development in the form of Argentina’s $6bn, 350,000t a year El Pachón copper project.
Nagle’s expansionist approach to supply represents a major departure from the Glasenberg philosophy, which was to milk the market deficit for as long as possible. “Glencore has options to participate if we’re right about the copper market, which would have to be screaming for new metal,” Nagle said.
The way Deutsche Bank sees it, Nagle’s comments are, however, an exercise in muscle-flexing. “We expect future growth spend to be measured and controlled, but this does represent somewhat of a shift from the previous strategy of keeping capex low and avoiding major projects,” it says.
The coal cushion is defensive. The copper leverage should lead to significant upside to the Glencore share price when the global economy eventually recovers
— Christopher LaFemina
Says LaFemina: “The coal cushion is defensive. The copper leverage should lead to significant upside to the Glencore share price when the global economy eventually recovers from the slowdown. Glencore is well positioned for now and for later, in our view.”
One final catalyst for Glencore’s share price is the continued streamlining of the business. The group has sold $3.4bn in noncore assets since the beginning of 2021 — a strategy Nagle accelerated soon after taking over from Glasenberg. According to analysts, the sale or spin-off of agribusiness Viterra remains “still a possibility”. The business generated first-half ebitda of $1.1bn and has a net present value of $8.2bn.
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