Why investors are cautious of Glencore

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.Coal the culpritIf 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.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,” said 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.”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 BankDespite 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,” said 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,” said analysts at UBS. “We expect Glencore to return excess cash to shareholders from 2025 and drive further growth with opportunistic M&A,” they added.A version of this article was first published in the Financial Mail.The post Why investors are cautious of Glencore appeared first on Miningmx.Weiter zum vollständigen Artikel bei Mining.com Weiter zum vollständigen Artikel bei Mining.com