In 2022, copper was the world’s hottest commodity. The price had surged from $6,000 per tonne in 2019 to $11,000 by mid-2021. Analysts were predicting further growth as the green transition turbocharged demand. Gary Nagle, the head of Glencore (LSE: GLEN), one of the world’s largest commodity companies, told the Financial Times that the copper supply would need to rise by an extra million tonnes a year by 2050 to meet green-energy targets. That demand, he predicted, would drive prices to $15,000.
However, far from spiking, prices have consolidated. The price dropped to a post-Covid low of $7,000 a tonne in mid-2022 before rising to nearly $11,000 a tonne early this year. It has since dropped back to the mid-$9,000 level. Still, the demand for copper hasn’t gone away. Australian miner BHP expects the world to consume an extra one million tonnes of copper per year until 2035. The demand for green energy and artificial intelligence (AI) data centres will drive the growth. AI could increase global copper demand by 3.4 million tonnes a year by 2050, BHP’s chief financial officer, Vandita Pant, told the Financial Times in September. So the outlook for the red metal appears to remain strong, but this year, weak demand in China has weighed on copper prices. Concern over China’s economic prospects has also hit the mining sector.
A successful turnaround for Glencore
Shares in Glencore, one of the world’s largest copper producers and traders, have tracked the copper price over the past five years, although the connection has broken down in recent months. The price of copper has risen around 10% this year, but Glencore’s stock has slid 8%, which could present an opportunity.
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Glencore has come a long way since 2015. That year, shares plunged 75% as investors lost confidence in its ability to manage its highly leveraged balance sheet. Glencore is one of the world’s largest miners, mining everything from gold to lead, zinc and copper. It also operates a vast trading and marketing network, buying, selling and moving key commodities around the world. This is where the company relies on debt to fund the buying and selling of commodities. While trading can be a risky business, it gives the company a unique insight into the global economy and commodity markets.
Glencore went into the 2015 downturn with $30 billion of net debt, but its aggressive turnaround plans saw this reduced to $10 billion, a level management has set as the group’s long-term target. The group has also made substantial efforts to reduce its legal exposure. Following a series of investigations and fines from the US Department of Justice, Glencore has reduced its reliance on high-risk, third-party agency traders, reducing risk across its operations.
Furthermore, management has removed uncertainty around the future of the group’s thermal coal arm. Earlier this year, Glencore completed the $6.9 billion purchase of Teck Resources’ coal business, Elk Valley Resources. It has said it would seek to combine these assets with its coal assets and spin them off into a new entity. Glencore wanted to draw a line under its exposure to coal and its reputation as a dirty, polluting fossil fuel in the hopes the remaining business would attract higher earnings multiple as a green metals-focused play.
This was a good plan, in theory. In practice, investors didn’t buy into the spin-off. Coal might be a dirty fossil fuel, but it’s a hugely profitable business for Glencore. It accounted for 47% of adjusted earnings before interest and tax during the first half of 2024, and between 2021 and 2023, Glencore earned $51 billion from its core assets, including coal; its current market value is only $65.5 billion. What’s more, there was scepticism that the spin-off would achieve the value required for the remaining company. Glencore said shareholders had been sceptical about the “scale of a potential MetalsCo [the remaining business] valuation uplift arising from a demerger”. Instead of the spin-off, Glencore has doubled down on its growth plans, and intends to return capital to investors.
Should you invest in Glencore?
These cash returns could be substantial. In its half-year results, Glencore guided for free cash flow of $6.1 billion in its current financial year, which, it said, “augurs well for potential top-up shareholder returns, above our base cash distribution, in February 2025”. Analysts’ estimates suggest the company’s shares will offer a dividend yield of 3.1% in 2024, rising to 4.6% in 2025 at the current price. That’s without including any potential share buybacks.
Despite the company’s tremendous progress since 2015, it’s actually cheaper today than it was at the time. The company is trading at an enterprise value to earnings before interest, tax, depreciation and amortisation (EV/Ebitda) ratio of 5.3 times, down from 8.6 times in mid-2015 and below the 10-year average of six times.
There are plenty of potential catalysts for the company in the near and long term: there’s the demand for copper, which is only set to increase; the steady demand for thermal coal, a cash cow for the group; and the potential re-awakening of the Chinese economy. China has been a headache for commodity markets in the last few years, but the country has pumped over a trillion dollars into the economy over the past month, alleviating some of the pressures that had weighed on demand. The fundamentals of the markets in which Glencore operates remain robust, but the company’s valuation seems to ignore the potential for long-term growth.
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