Rethinking coal means rethinking this miner

However, a shift in investor appetite for coal means the company will stay in one piece, and the steelmaking coal mines acquired through the $6.9bn (£5.3bn) Teck Resources (US:TECK) deal will be added to the main group.

“There's not that many potential shareholders who would come onto the register if coal was gone,” said chief executive Gary Nagle in August, explaining the about-face. 

The company’s existing shareholder register includes investment giants such as BlackRock and various Vanguard funds. Former boss Ivan Glasenberg also retains a 9.9 per cent share and the Qatar Investment Authority holds another 8.6 per cent. This is a who’s who of global investors, so the decision to stick with coal shows a marked turnaround in views on fossil fuels. 

It is easy to see why. What some saw as a long-term coal price decline dramatically reversed after Russia invaded Ukraine, sending Glencore’s earnings to record levels. 

What now? 

Glencore makes its money from metals and coal mining, and commodities trading. Marc Rich founded the company as a trading house in 1974, but it shifted towards mining via a series of acquisitions. The company now makes most of its profits from mining, but the trading unit adds serious firepower when markets are volatile. 

The trading unit recorded adjusted operating profit of $6.4bn in 2022, for example – 73 per cent higher than in 2021. This fell back to $3.5bn in 2023, but shows the value of having the traders around when stormy weather hits. 

Glencore's mining and trading strategy has been vindicated recently – at least from a financial perspective. This month, the International Energy Agency increased its forecasts for coal demand for 2030, and reported a climb in coal use for this year as "strong electricity demand in China and India results in higher coal demand that more than offsets continued cuts in coal use in the European Union”.

Glencore operates thermal coal mines in Colombia and has added to its holdings there by buying out BHP (BHP) and Anglo American (AAL) in 2022. 

On the base metals side, the company’s reticence in adding copper to the market was shown to be canny after the price pulled back from record levels in the first half as weaker demand overruled supply concerns. 

On a longer-term basis, though, the mining industry remains desperate for more copper production and Glencore is well placed to deliver. Management said the mines and projects already in its portfolio could add 1mn tonnes in new supply, equivalent to annual output of the world’s largest copper mine, Escondida in Chile. 

“Glencore’s 30 per cent exposure to copper alongside its unsanctioned copper-heavy growth portfolio should support its share price given the tightening refined copper market,” said RBC Capital Markets analyst Marina Calero.  

The company is allowing for some investment, despite its reluctance to add copper to the market when demand is faltering. Around $400mn will go into projects in Argentina this year, according to Calero. Meanwhile, Nagle has pitched the idea that coal profits could be used to fund growth in the copper and broader ‘transition’ metals portfolio. 

It should also be noted that Glencore is regularly held up as an opportunistic dealmaker – it was a mooted buyer of Anglo American after the De Beers owner rejected BHP’s approach in May. But the view from Nagle and his board is that they have enough copper in the portfolio, so any acquisition will be on their terms and at the right price. 

Copper plus

Copper is critical to the continued electrification of the developing world, as well as the energy transition. However, Glencore also mines cobalt (as a byproduct), lead, nickel, zinc and vanadium. 

Nickel and cobalt are in weak spots due to oversupply, and earlier this year the miner stopped production at the Koniambo mine in New Caledonia and is likely to get the 49 per cent stake in the mine off the books through a cut-price sale.

This is reflective of its wider approach. Glencore has always been happy to chop and change the portfolio depending on what is making money or what looks cheap at any given time. Its size also means keeping tonnes out of the market can influence prices, as seen in the past with the zinc market. 

The outlook for next year is less copper, more zinc and more coal. Jefferies expects mining cash profits to fall to a four-year low of $11.5bn in 2024, but a swift uptick is due to follow. The 2025 forecast is $15bn, which would mark the division's second most profitable year on record.

Shareholder payouts should follow this measure upward, although Glencore has a different approach to most other dividend payers. A forward payout level is set depending on the previous year’s profits – shareholders voted in May on a 13¢-a-share payout in respect of 2023.

The first-half dividend is paid after the AGM, and the second-half payment comes just a few months later in September. The company can top these up and will use buybacks if debt comes in under the cap set. The outlook for added returns is good, with Nagle saying in August that the state of the books “augurs well for potential top-up shareholder returns”. 

Why not before? 

It might seem strange to propose Glencore as a buy now, given its valuation has been climbing over the past year or so. It is important to note, however, that the company is still trading below the level seen before the 2016 downturn. In mid-2015, it traded on an enterprise value/Ebitda multiple of 8.6 times. Today, it is closer to 5.3 times.  

Jefferies says the drop “has been one of the sector’s most significant despite measures that the company has taken to substantially reduce downside risks”. 

The company has tackled its various corruption probes, for example – Swiss and Dutch investigations were resolved in August, marking the end of government investigations into historical misconduct. Some legal cases are still dragging on – six former Glencore employees appeared at Westminster Magistrates’ Court last month charged with bribery offences – but these are focused on individuals, not the company. 

Secondly, in a rollercoaster year for the metals business, Glencore's portfolio has done well. Iron ore dropped significantly between July and September but is now being propped up by Chinese government stimulus. And crucially, Glencore does not rely so heavily on the steel market for earnings and dividends as BHP and Rio. 

Glencore will never be an uncontroversial stock. In the past, there have been red flags associated with corruption in the trading division and the characters with whom it did business. Meanwhile, its attachment to polluting coal will scare off some shareholders.

On the first point, there are still risks, but with the UK, US, Swiss, Dutch, Brazilian and Democratic Republic of Congo regulators signing off on fines already, the recent rush looks over. As to environmental qualms, Glencore would argue that coal will be mined anyway, so it may as well be extracted by a publicly listed company with globally recognised standards. 

The risk factors then go back to the usual issues faced by mining companies: volatile metals prices, operational issues and rising costs. Inflation has flattened out across the sector and Glencore has strengthened its balance sheet to the point where a downturn would be weathered far more easily than last time, when it had to cancel dividends and raise cash from investors.

Indeed, the yield as listed at 2.6 per cent is not representative of returns on offer here, and the copper portfolio should bolster growth as demand ratchets up later in the decade. Buy.