Investment analysts attempting to parse the comments of Glencore’s fast-talking CEO Gary Nagle at the year-end results presentation in February had much to ponder. Listening to Nagle, the company was trucking along contentedly. Beneath the surface, however, analysts detected Glencore was wrestling with the market’s relatively low appreciation of its value.
They pointed to three factors. The first was Glencore’s meeting with rival miner Rio Tinto last year to discuss mergers & acquisitions (M&A). Since neither company has commented on the speculation it’s impossible to say what was planned, but according to Deutsche Bank, the talks implied Glencore might consider radical portfolio changes.
“The recent Glencore-Rio merger newsflow suggests to us that management may still be open to separating the coal assets and potentially breaking up the business,” it said in a report.
“Don’t be fooled … M&A still on the menu,” said Bank of America analyst Jason Fairclough. Though this remark was aimed primarily at the diversified mining sector in general, it could just as well apply to Glencore alone.
Second, Nagle confirmed he had sought external advice on whether to move Glencore’s primary listing from London, possibly to New York, in an effort to spritz up the stock.
Third, and most obvious as it relates to Glencore’s view of its own valuation, is the $1bn share buyback programme it announced. It intends to complete the buyback in double-quick time, but by August at the latest.
There is something in each of these ideas. Glencore was founded on M&A; deal-making is never far from its thoughts. Last year it bought the Canadian firm Teck’s stake in Elk Valley Resources (EVR), a metallurgical coal miner, for $7bn in cash. The recent sale of its $1bn stake in agribusiness Viterra to Bunge will finance buybacks. In recent times, it has sold about 20 assets and spent $270m buying minorities in coal ventures, adding 20Mt to annual production.
But it’s debatable whether Glencore would readily separate from its coal production now, having only rowed back from that strategy in July following consultation with shareholders. As for relocating a primary listing in New York, there are just as many good reasons why it might stick with London. For one, changing a primary listing is costly and risks share flow-back. Second, Glencore already has a US investor base comprising 50% of the register. Third, indexation in the S&P 500 is no slam dunk, as the locals might say.
If there is a major misprice of Glencore, it might be as simple as the sharply corrected prices of thermal and metallurgical coal. Of all Glencore’s commodities, these two coal categories saw the biggest fall in earnings before interest, tax, depreciation and amortisation (ebitda) margins since financial 2023. Based on 2025 forecasts, thermal coal will achieve an ebitda margin of about $22/t, a 66% decline from 2023. At $82.6/t the ebitda margin for metallurgical coal is 34% lower.
We believe that Glencore could deliver a self-help strategy to unlock value and improve shareholder returns in a challenged pricing environment
— Matt Greene
This deterioration is reflected in Glencore’s free cash flow yield. In the double digits in former financial years, last year it came in at 6%-7%. “Glencore has been viewed as a better free cash flow yield story [among] the majors, as it is not executing any major growth projects,” says Matt Greene, an analyst for Goldman Sachs. “However, the results demonstrated ... the asset base is struggling to generate sufficient cash flow in the current pricing environment, raising uncertainty around the company’s ability to drive better capital returns vs its peers.”
Despite this criticism, cash generation has hardly been measly. After absorbing the purchase of EVR, Glencore reported net debt of $11.2bn as of December 31, only just above a $10bn cap below which it sanctions payment of a top-up dividend. (It pays a base dividend comprising $1bn from its marketing division and 25% of adjusted attributable cash flow from its mines).
“Weaker coal prices have been a major headwind for Glencore over the past six months, but we see value at current levels and the shares offer sector-leading shareholder returns in 2025,” Deutsche Bank said. Bank of America wrote of “deep value” in Glencore. The group is trading at a 30% discount to the sum of its parts, it said.
Hence the company’s aggressive share buyback programme. Once completed, another tranche of repurchases might be launched soon afterwards. It’s worth remembering Glencore’s track record in this regard: since 2021 it has bought 1.2-billion of its shares, representing 10% of its share capital.
“We believe Glencore could deliver a self-help strategy to unlock value and improve shareholder returns in a challenged pricing environment,” says Greene. This could involve “monetising noncore assets/commodities and returning proceeds to shareholders [via buybacks, for instance] until a clearer growth strategy is outlined”.
Glencore is hardly alone in market weakness. Apart from Anglo, which is rerating after its disastrous production update of late 2023, most diversified counters have suffered the effects of pedestrian Chinese growth. BHP and Rio Tinto have been hard hit by iron ore price declines made worse by a recovery in existing supply and the promise of supply growth.
“Glencore is well positioned due to its mix and growth optionality,” say analysts at UBS. “We expect Glencore to return excess cash to shareholders from 2025 and drive further growth with opportunistic M&A,” they add.
NO LONGER A FOUR-LETTER WORD
The thermal coal market has moved on since the energy security crisis sparked by Russia’s invasion of Ukraine. According to analysts, prices for thermal coal and the steel-making type, metallurgical coal, are muted. “We see no signs of price recovery in the near term,” Bank of America says of China’s coal market, which at about 219Mt represents a fifth of all seaborne trade in 2024.
It’s worth recalling just how distorted the energy complex became in the wake of the invasion. Thermal coal exported from Australia surged to $450/t in September 2022 from as low as $50/t in 2020, amid the pandemic. For a brief period, coal was trading higher than oil (on a heat adjusted basis) for the first time in history. Two years later thermal coal was trading in a more typical $100/t-$150/t band.
More recent market weakness has clearly weighed heavily on the performance of Glencore, as well as many pure-play miners. On the JSE, Thungela Resources has seen its share price sink to R100-R111 a share over the past 12 months from R377.50 in September 2022.
But at $100/t, thermal coal prices are hurting about a fifth of suppliers, according to Glencore calculations (the same is true for metallurgical coal at about $175/t). This suggests marginal cost support at current levels. Glencore recently concluded a coal supply contract with a Japanese buyer at $7/t above the futures price. Having said that, inventories are high among major consumers such as China, so a recovery in prices could be capped.
The long-term outlook for metallurgical coal is favourable, largely because it’s seen as a critical mineral in many parts of the world. Glencore’s acquisition of EVR has been applauded. But it’s in the outlook for thermal coal where there’s been significant change over the years.
“As renewables advance, it is worth noting that the engine of the global economy is moving away from China towards India and Southeast Asia,” says Bank of America. “For better or worse, we believe thermal coal will likely continue to play a key role in energising the world economy.”
It sees investment in thermal coal power stations for “years to come”, especially in emerging markets, even as Europe, Japan and the US move away from it. “Vietnam’s thermal coal imports rose 31% in 2024 to 44Mt, while global thermal coal demand rose only 1%,” says BMO Capital Markets, a Canadian bank.
The surge in coal imports has been driven by Vietnam’s manufacturing industry boom, with coal burning capacity expected to rise a further 15% after the completion of all projects now under construction, the bank says.
“Coal is no longer a four-letter word,” said Glencore’s Gary Nagle at the firm’s year-end presentation. “In today’s world, the pendulum has swung back and recognises that energy coal is needed as the world transitions.”
Whereas Glencore once forecast coal production would decline in line with its commitment to decarbonisation targets, it’s noteworthy that production from last year to 2028 is hardly changed at about 100Mt annually.
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