Interactive Investor

Glencore is a buy again amid dividend rumour

There’s talk that the mining company might rethink the demerger of its coal assets and instead return a substantial amount to shareholders. City writer Graeme Evans reveals the sums of money being discussed.

13th March 2024 13:40

Graeme Evans from interactive investor

Glencore shares today built a foothold above 400p amid more City speculation that the mining giant will delay its coal demerger in favour of resuming bumper cash returns.

The stock lifted 12.5p to 412.45p after Deutsche Bank restored its “buy” recommendation on the possibility that Glencore (LSE:GLEN) will again become the leading cash generator in the sector. 

Earlier this month, UBS estimated that by deferring a plan to spin-out the coal operation the FTSE 100-listed company would be able to announce a special distribution of $5 billion (£3.9 billion).

UBS’ 500p price target compares with Deutsche Bank’s unchanged 540p, having seen the shares fall by as much 20% at one point this year to as low as 368p.

The selling of Glencore shares continued after February’s annual results, when chief executive Gary Nagle made no repeat of last September’s $1 billion top-up payment.

Glencore’s record of shareholder returns since 2020 amounts to $20.3 billion (£16.1 billion), comprising $10 billion of base distributions and $10.3 billion of “top-up” returns.

These payments were determined by a net debt cap of $10 billion (£7.9 billion), a target level that’s now been halved following a deal to buy the steelmaking coal business of Canada’s Teck Resources (TSE:TECK.A) for $6.9 billion. 

Glencore has said the acquisition unlocks the potential for a value-enhancing demerger of its thermal and steelmaking coal assets and the operations of Teck’s Elk Valley Resources.

With deleveraging of the balance sheet now its priority, the company is planning a $1.6 billion (£1.3 billion) base distribution of 13 US cents share for 2024. 

However, Deutsche Bank said today it expects an increased market focus on whether the plan for a New York-listing of the CoalCo assets will go ahead.

Analyst Liam Fitzpatrick said: “We believe there is a growing chance that the planned separation is deferred and, if so, Glencore will again become the leading cash generator in the sector, with a potential $2-$3 billion shareholder cash return top-up possible in the second half of 2024.”

His comments were made a few days after UBS said it was not clear that the spin-out of CoalCo will crystallise meaningful value upside for Glencore shareholders versus the lower-risk option of retaining the status quo.

UBS said discussions with investors suggest their views on the responsible management of coal are evolving, while it added there was significant uncertainty on the multiple at which the remaining Glencore metals business will trade. 

The Swiss bank said: “Glencore is well positioned due to its mix and growth optionality. We see potential for Glencore to decide to retain coal and return excess cash with a large buyback. We see this as a positive catalyst.” 

Many of Glencore competitors have opted to exit thermal coal, whereas the FTSE 100–listed company chose to wind down assets through a plan for mine closures by 2035.

Lower thermal coal prices have been a near-term headwind, although UBS said recently it expects the Newcastle coal futures to hold above $100 a tonne in 2024 due to resilient Japanese demand and well-managed supply.

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