Glencore shares tipped to deliver total return of about 50%

Tight commodity supplies are unlikely to ease any time soon, adding a further boost for this already attractively priced FTSE 100 stock, says our City expert.

Elevated coal prices mean Glencore (LSE:GLEN) shares offer “compelling” value, with the potential to deliver a 50% total return upside over the next two years, a City bank said today.

The bullish assessment from Deutsche Bank comes even though Glencore shares have already risen by a fifth in the past month, following a wider surge in commodity prices.

A quarter of Glencore’s 2021 earnings came from coal, which until recently had been valued on low multiples due to environmental and demand concerns.

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That has changed since the Ukraine war triggered a flight from Russia imports and prompted governments to consider whether to delay the phasing out of coal-powered generation in order to diversify their energy mix.

With Russia accounting for about 16% of global thermal and coking exports, Newcastle coal futures topped $400 a tonne at one point in early March, compared with just above $200 a tonne prior to the Ukraine invasion.

The price has since settled at $350 a tonne, with warmer weather and lower gas prices likely to ease some of the upward pressure in the coming weeks.

But Deutsche Bank expects tight supply conditions and security of supply considerations to keep the price elevated into 2022/23. Compared to January levels, it notes that benchmark forward prices have lifted by an average of about $50 a tonne for that period.

Today’s report says: “A 1-2 year period of elevated coal prices could make Glencore one of the leading shareholder return companies in the market, adding to what we already felt was a compelling self-help and re-rating story.”

Its verdict is based on analysis of the cash generation impact of every $10 a tonne change in the export price of thermal and coking coal. Its February free cash flow forecast for 2022/23 was $19 billion or 23% of current market value, but this increases to $34 billion or 41% under its latest forecasts, and $42 billion (51%) at spot prices.

Deutsche Bank says: “If roughly half of free cash flow is channelled towards share buybacks over the next two years, Glencore’s share count would reduce by 20% and lift the bank’s mid-cycle valuation to 625p.”

With the payment of dividends over the next two years, this implies a two-year total return potential of about 50%. Deutsche Bank’s current price target is 580p.

Other banks have also backed Glencore shares to go higher, with Goldman Sachs recently raising its estimate from 540p to 600p and HSBC highlighting a figure of 530p.

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The FTSE 100 stock was the fourth most-traded on our platform this morning, but interactive investor customers are divided over prospects after a 50-50 split between buys and sells.

In 2021, Glencore delivered about $2.8 billion of shareholder returns, which included a $500 million special cash distribution and $750 million of share purchases.

For this year it has recommended a $0.26 per share base distribution, worth $3.4 billion and payable in two equal instalments. This comprises $1 billion from marketing cash flows and $2.4 billion of industrial cash flows.

The company’s annual report, which has just been published, reveals that copper generated 37% of last year’s earnings, with zinc accounting for 12%. The market outlook for both is positive, as these are transition metals that will be central to decarbonisation efforts.

Glencore operates about 26 coal mines across Australia, Colombia and South Africa. An estimated 85% of this production is exported to countries where coal continues to play a leading role in power generation, given its reliability and affordability.