Glencore undervalued on the stock exchange
Glencore, the world’s largest commodities trader whose roots go back to the legendary oil and metal trader Marc Rich, has had a bad year in 2018 — an
annus horribilis or une mauvaise année, as my Swiss friends put it. The shares are down 20 per cent. The Justice Department is investing corruption and money laundering in three countries where corruption is an art form even by Third World standards — Nigeria, Congo (Conrad’s fabled hear of darkness) and Venezuela. Did Glencore cry uncle to Washington? Not at all. CEO Ivan Glasenberg, who owns eight per cent of the Baer, Switzerland-based trader, announced $1 billion share buybacks.
Glencore shares have been a loser since its IPO long time centuries ago in a galaxy far, far away — actually, the London Stock Exchange at 526 pence. Glencore trades at a mere eight times earnings now, a huge discount to BHP or Rio Tinto. However, I am convinced that, despite the legal sword of Damocles wielded by Justice, its shares are grossly undervalued and promise me a potential 25 per cent total return. Why?
One, the $1 billion shares buyback removes deal risk. Glencore’s CEO is a serial dealmaker and the financial markets long speculated that Bunge was his next target. However, Bunge shares have now fallen to a six-month low, removing its takeover premium. The smart money now believes that a Glencore bid just will not happen — at least for now.
Two, the share buyback means that the firm’s net debt is near its corporate ceiling of $16 billion. This suggests the Metal Men are not planning another major deal. This is positive for shareholders.
Three, Jeff Currie of Goldman Sachs believes investors can expect a 10 per cent return on commodities. Jeff’s views have been a lodestar to my strategic and tactical moves in natural resource investing for more than a decade. If Jeff is right, the stars are aligned for Glencore shares to move higher.
Four, Glencore has a fortress balance sheet in global commodities trading. In 2017, Ivan Glasenberg boasted that the company could even afford a $20 billion dividend after a public spat with short sellers in the City of London.
Five, Glencore is now the world’s second-largest crude oil gas and refined products trader, with a turnover of 6.5 million bpd.
However, one reason why many American fund managers are selling the shares because it restarted royalty payments to billionaire Dan Gertler, who made a fortune in diamond, copper and cobalt with his ties to the Kabila regime in Kinshasha. Gertler has been subject to blocking sanctions by the US and it is unwise to challenge the global writ of Uncle Sam in the Age of Trump.
Gertler boasts he should get a Nobel Prize for his deal-making in Congo — but the World Bank and the IMF disagree. Yet Gertler was Glencore’s partner in the Democratic Republic of Congo, an African state where even Chinese state companies have found it impossible to make money. Glencore’s dividends to shareholders are totally secure, in the $2.8-$2.9 billion range. The timing of the stock buyback announcement tells me that Glencore management thinks the shares are undervalued and that the balance sheet can handle any punitive legal fines from Washington. The risk/reward calculus, in my opinion, is skewed in my favour as a new money shareholder.
The world’s top mining analysts expect Glencore to earn $54 billion — I repeat, $54 billion in Ebitda in the next three years. There is no doubt in my mind that this means a tsunami of cash returns to shareholders in the next three years as long as there is no Black Death in the world commodities market — though this is a sector where, to paraphrase Don Rumsfeld’s charming words on his Iraq war performance, merde happens!
Glencore has exposure to the ideal commodities basket in this macro milieu — copper, zinc, iron ore, thermal coal and energy. I concede the Congo business is one major reason why the shares trade at a Cinderella valuation metric. Congo is a $10 billion asset and $3 billion Ebitda business, unlike Nigeria and Venezuela, which do not even generate one per cent of revenues. Glencore is a trading colossus that can well generate $10 billion in free cash flow. Unless Justice brings criminal charges Glencore shares should move higher.