ii view: Glencore details broadly reassuring update

Nine-month production update

• Coal production up 2% to 83.9 million tonnes
• Copper production fell 5% year-over-year to 735,800 tonnes
• Zinc fell 4% to 672,100 tonnes
• Cobalt rose 2% to 32,500 tonnes

Chief executive Gary Nagle said:

“We are pleased to report a solid production performance from our underlying base business over the first nine months of the year. In our Marketing segment, we continue to expect a full year 2023 Adjusted EBIT outcome above the top end of our $2.2 billion to $3.2 billion per annum long-term guidance range.”

ii round-up:

Mining giant Glencore (LSE:GLEN) today detailed year-to-date production broadly in line with City hopes as it left full-year estimates for core commodities coal, copper, zinc, and cobalt all unchanged. 

Nine-month production for coal, accounting for almost two-fifths of half-year profits, rose 2% to 83.9 million tonnes. Copper output, accounting for a further quarter of profits, fell 5% to 735,800 tonnes, although was largely due to a previous mine sale. 

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Shares in the FTSE 100 company rose marginally in UK trading having come into this latest news down by around a fifth year-to-date. That compares to a one-tenth fall for major iron ore miners Rio Tinto Registered Shares (LSE:RIO) and BHP Group Ltd (LSE:BHP) and a 1% decline for the FTSE 100 index itself.  

Glencore has operations in over 35 countries and is both a producer and trader of more than 60 different commodities. Production for cobalt, used in electric vehicle batteries, retreated 2% to 32,500 tonnes. Zinc output fell 4% to 672,100 tonnes, hindered by the earlier year sale of South American operations. 

Full-year estimates for nickel and ferrochrome production were both reduced given issues such as smelter maintenance requirements. 

Full-year profit expectations for its trader or marketing division were left unchanged at between $3.5 and $4 billion. Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the update.

ii view:

Glencore is a major miner of commodities via its Industrial Assets division. Coal and copper are its two biggest profit generators, followed by zinc, nickel, cobalt and ferroalloys. The FTSE 100 company is also a trader of more than 60 different commodities through its Marketing division, including oil and agricultural products. Employing around 140,000 people in more than 35 countries, customers include industrial consumers, such as those in the automotive, steel, power generation, battery manufacturing and oil sectors. 

In April, the company proposed a merger/demerger plan with fellow Canadian metals and coal miner Teck Resources Ltd Class B (Sub Voting) (NYSE:TECK). The plan would see the pair combine and then simultaneously split their combined coal and metals operations into two standalone companies. Glencore more recently proposed a purchase of Teck’s steelmaking coal business which, if successfully acquired, would eventually demerge along with its own existing coal business. Teck Resources has so far rejected the proposals. 

For investors, the uncertain global economic outlook, particularly for big commodity buyer China, continues to cast a shadow, while production of fossil fuel coal may deter some potential investors. Previous corruption allegations and legal settlements potentially add to ethical concerns, while exposure to political instability in countries of operation such as Colombia, the Democratic Republic of the Congo and Kazakhstan also warrant consideration. 

More favourably, a potential deal with Teck Resources of Canada could eventually see its coal operations effectively separated out, leaving investors with a clearer choice as to whether to invest in coal or not. Diversity of both commodities mined and operations given its marketing business is a strength not seen at rivals. China is implementing measures to try and boost its economy, while exposure to energy transition metals such as cobalt and zinc used in batteries is not to be overlooked. 

On balance, and despite ongoing downside risks, a forecast dividend yield of over 8% and consensus analyst estimate of fair value at over 550p per share should keep investors interested.

Positives: 

• Diversity of commodities and operations
• Focus on shareholder returns

Negatives:

• Uncertain economic outlook
• The weather can hinder performance

The average rating of stock market analysts:

Buy