Holding steady, despite headwinds

Despite a good performance and strong cash flows, Glencore’s market value remains out of kilter with those of its peers, a continuation of a trend that started early in 2018 when bad news about the company’s dealings in the Democratic Republic of Congo (DRC) began trickling in.

In July, this culminated in a subpoena from US authorities under the Foreign Corrupt Practices Act and antimoneylaundering statutes, relating to Glencore’s dealings in the DRC over the past decade, and in Venezuela and Nigeria.

In its interim results for the year ended June 31, the com- modities producer and trader reported that net income had increased 13% to $2.5bn and revenue grew 8% to $108.5bn. EPS increased from US17c a share to US19c, and net debt was down 16%.

In the absence of opportunities for mergers or acquisitions, Glencore said it would prioritise shareholder returns in the form of dividends and share buybacks. The company declared a dividend in February, valued at $2.9bn, and enacted a $1bn buyback in July.

On the day of the interim results release, Glencore CEO Ivan Glasenberg said he hoped the strong cash flows — as

demonstrated by earnings before interest, tax, depreciation and amortisation of $8.5bn — would draw investors back to the company share. In the days that followed, the share lifted 4%, from R56.09 on August 8 to R58.43 on August 13.

“Political risks in the DRC and more recently the [department of justice] subpoena have weighed on sentiment, but the equity story’s attractive fundamentals remain intact,” says a research note from Exane BNP Paribas. “The group boasts the highest volume growth among diversified miners, a competitive advantage in the current inflationary environment.”

Goldman Sachs analysts say that while a discount to peers may be warranted due to uncertainty around the US justice department investigation, the size of the discount is unwarranted, given strong free cash flow generation, a strong balance sheet position and earnings and returns momentum.

Despite strong fundamentals, Glencore has been one of the worst-performing stocks relative to its peers — year to date it’s down 16% compared with an average 9%, the analysts say. Goldman Sachs’ forecast is for an average free cash flow yield of 16% over the next three years, with big jumps to come from copper, cobalt, zinc and coal operations.

Gerbrand Smit, chief investment officer at NeFG, says the discount is not justified if one considers the sorts of fines the US justice department has handed out previously. BHP Billiton, for example, was in 2015 fined $25m for alleged corruption — equal to just 0.04% of Glencore’s $58bn market cap.

Others say the risks are more serious. Sebastian SpioGarbrah, chief analyst at DaMina Advisors, for example, warns of a “black swan event”: further bad news could send Glencore’s share price plummeting, and cause it to lose the US dollar credit lines on which its marketing business relies.

Bernstein analysts say the trading business is vulnerable to large swings in cash flow generation because it requires high levels of working capital. “Headline risk remains a significant concern,” they say.