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, and as confidence evaporated, investors started to wonder if creditors would pull the plug.
However, the FTSE 100 company pulled itself back from the brink by raising cash from shareholders and outlining plans to cut debt. And today its outlook couldn’t be more different: surging commodity prices are generating a windfall for the organisation and its traders.
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As profits have jumped, the share price of Glencore has followed suit. The stock is up 550% from the all-time low in January 2016.
Glencore’s fortunes have greatly improved over the past six years
The future has rarely looked brighter 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 buying assets other companies didn’t want. It specialised in coal and copper and 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.
The trading house is capitalising on what it is calling “pricing differentials” in disrupted energy markets. The firm’s trading arm allows it to buy coal cheaply in one market, and ship it to regions where demand is high.
There are not many other businesses in the world that have access to the kind of commodity infrastructure available to Glencore. As a result of these “pricing differentials” the company is expected to earn around $82 to $86 per tonne from coal sales this year, up from the earlier prediction of $32.8. The group has said it is looking to ramp up coal output by 20% to capitalise on booming demand.
It’s not just the coal market where Glencore is exploiting its competitive position to earn supernormal profits. It’s now forecasting half-year adjusted earnings before interest and tax (EBIT) of $3.2bn for its marketing and trading arm this year. That’s at the top end of management’s long-term EBIT guidance band.
Higher copper prices are also contributing to the firm’s growing bottom line, although due to production snarl-ups, copper production is set to fall by around 3% this year. Still, the company is looking to increase its nickel and ferrochrome production by 3%, which are both vital resources for the green economy.
With its production and trading arms, Glencore is uniquely positioned to profit from this trend. Over the past five years the price of copper has risen by 64% while the price of nickel has surged by 170%.
All of this bodes well for Glencore’s growth, not just over the next few years but for the long-term as well. Refinitiv analyst estimates suggest the company’s earnings will grow by 145% this year to $17bn, although I wouldn’t be surprised if these numbers are revised higher in the months ahead.
Glencore expects “more normal market conditions” to return in the second half of the year. But even the most optimistic analysts do not expect commodity prices to fall dramatically for the next year or so, unless there’s a severe economic downturn (although that’s not out of the question). Even then, as the world tries to shift away from hydrocarbon energy, demand for resources such as copper, nickel and cobalt is projected to continue growing.
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 said it would return $3.4bn to shareholders this year via dividends, split across two payments. It also announced a $550m share buyback. Analysts think the company could return even more in the years to come.
Current forecasts suggest the business will pay a dividend of $0.57 (46p) per share this year and $0.51 (41p) in 2023. Based on these numbers Glencore will yield 9.9%, making it one of the highest-yielding stocks in the FTSE 100.
For all of Glencore’s attractive qualities, it does have some drawbacks. 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.
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.
Despite these drawbacks, there’s no denying the commodity group is minting money today and if analyst forecasts are to be projected, shareholders will be well rewarded over the coming years.
What’s more, based on current growth projections shares in the FTSE 100 company are currently selling on a forward price/earnings (p/e) ratio of 4.2. That seems incredibly cheap for a company projected to report earnings growth of more than 100% this year and one that has a near double-digit dividend yield.
Rupert was the former Deputy Digital Editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert has freelanced as a financial journalist for 10 years, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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