In 2015, the Glencore (LSE: GLEN) share price plunged as the City began to question the company’s very survival. A sudden slump in commodity prices had caught the group off guard, at a time when it was also carrying a lot of debt. Easy access to finance is vital for commodity traders such as Glencore, but as confidence evaporated, investors started to wonder if creditors would pull the plug.
The FTSE 100 company managed to pull itself back from the brink by raising cash from shareholders and outlining plans to reduce debt. Today its outlook couldn’t be more different. Surging commodity prices are generating a windfall for the organisation and its traders.
As profits have jumped, Glencore’s share price has followed suit. The stock is up more than 500% from the all-time low at the end of 2015.
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Glencore’s fortunes have greatly improved over the past six years
The future has never looked better for Glencore as its traders capitalise on rising commodity prices and supply chain disruption.
Glencore started its life as a commodity trader. Then in 2012 it merged with mining powerhouse Xstrata. Under the stewardship of CEO Mick Davis, Xstrata became a global giant by acquiring assets other companies didn’t want. It specialised in coal and copper and Glencore has doubled down on this master plan despite attracting criticism from climate activists.
The strategy is paying off handsomely.
Thanks in part to strong coal prices, profit attributable to shareholders hit $5bn (£4.1bn) in 2021, up from a loss of $1.9bn (£1.6bn) in 2020. Asian coal prices doubled last year and have remained high this year. Glencore is ramping up coal production to meet this increasing demand with a 20% jump in output projected.
Higher copper prices are also contributing to the firm’s growing profits, although due to production snarl-ups, copper production is set to fall around 3% this year. Still, the company is looking to increase its nickel and ferrochrome production by 3%.
Copper and nickel are vital resources for the green economy and the demand for both is booming. Glencore, with its production and trading arms, is uniquely positioned to capitalise on this trend. Since the beginning of 2020 the price of copper has jumped 46% while the price of nickel is up 60% in the past 12 months.
All of this bodes well for Glencore’s growth not just in the next few years but for the long-term as well. Refinitiv analyst estimates suggest the company’s earnings will grow 138% this year to $17bn, although analysts also believe growth will moderate in the years after.
Profit growth is helping support the Glencore share price
Based on profit estimates, the business is on track to get its long-term debt under $10bn this year. If it hits this target, special dividends and share buybacks could follow.
After last year’s results, Glencore announced it would be returning $3.4bn to shareholders this year via dividend split across two payments. It also announced a $550m share buyback. Analysts think the company could return even more in the years to come. They’ve pencilled in a dividend yield of 9.3% for 2022 and 8.6% for 2023.
For all of Glencore’s attractive qualities, it does have some drawbacks as well. Investors worried about the climate might not want to buy into one of the world’s largest coal producers. Management estimated in February that coal would provide nearly 40% of earnings before interest, tax, depreciation and amortisation (ebitda) this year. And the coal windfall might not last if the world gets serious about bringing down emissions in the years ahead. If coal consumption drops off a cliff, the company could be left with a lot of costly, loss making assets.
Then there are the corporation’s legal issues. Glencore is being probed by authorities around the world concerning its conduct in certain regions. It has already put aside $1.5bn to deal with probes by the UK, US and Brazilian authorities. More charges could follow.
The organisation is also a bit of a black box. The group’s traders make billions every year buying, selling and moving commodities, which requires huge amounts of capital and the use of derivatives to hedge exposure. However, the nature of trading means shareholders never really know how much exposure Glencore has to certain commodities and how much it owes to different parties.
Still, Glencore’s strategy is paying off and while there are risks attached to the company, with the stock trading at a forward price/earnings (p/e) ratio of 4.2 and further cash returns on the cards, it looks to be one of the cheapest ways to play the current commodity bull market.
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