ii view: Glencore scraps the dividend

Elevated debt and now no dividend. Should investors look elsewhere?

First-half results to 30 June

• Adjusted profit (EBITDA) down 13% to $4.83 billion
• No dividend payment
• Net debt up by 12% to $19.7 billion from 31 December 2019

Chief executive Ivan Glasenberg: said: 

"Every aspect of life in 2020 has been impacted by the Covid-19 crisis. Our teams have adapted to these difficult conditions and we are pleased to announce an overall strong financial performance from our various businesses, reflecting the countercyclical earnings power from our large scale Marketing activities, combined with a cash generative industrial asset base, which quickly adapted to the changed environment.

"Over the longer term, our diversified commodity portfolio, positions us well to play a key role in the next upward economic cycle, benefiting in particular from the commodities required for the transition to a low-carbon economy. We remain focussed on creating sustainable long-term value for all stakeholders."

ii round-up:

Mining company and commodity trader Glencore (LSE:GLEN) today scrapped its half-year dividend payment in favour of reducing debt which had risen to over $19 billion.

The debt total is above its $10 billion to $16 billion target range, with management expecting it to be back within its target range come the end of 2020 given current levels of healthy cashflow. 

Glencore shares fell by more than 4% in early UK trading and are down by around a fifth year-to-date. Shares of rivals BHP (LSE:BHP) and Rio Tinto (LSE:RIO) are less than 1% lower and up by more than 4% in 2020. Rio recently announced a 3% increase in its half-year dividend to $1.55 per share, with net debt up but standing at under $5 billion.

Adjusted profits at Glencore of $4.83 billion, although down 13% year-over-year, were at the upper end of analyst estimates. 

Profit for its commodity trading or marketing business doubled compared to the first half of 2019 given highly volatile commodity prices at both the start of 2020 and as the corona crisis developed. 

Movements in the oil price have created particular opportunity for traders. A supply dispute between producers Saudi Arabia and Russia along with the hit to demand from the Covid pandemic have both strongly influenced the price year-to-date. Storing oil when prices plunged earlier this year and then selling later at higher prices is likely to have contributed. 

For its more traditional mining and energy business, metals suffered a 16% decline in adjusted profit to $2.2 billion. Copper production retreated by 11% to 588,100 tonnes for the first half while cobalt output fell 33% to 14,300 tonnes as a mine in the Democratic Republic of Congo was closed. 

Glencore has around 150 mining and oil production assets in over 35 countries. It also provides financing, logistics and other services to producers and consumers of commodities. Despite some temporary operational closures due to Covid-19 in the period, the pandemic overall caused minimal disruption according to management. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather, not to mention trying to second guess the price direction of the commodity being extracted, can all impact financial performance. 

For Glencore specifically, a diverse portfolio of mined commodities offers attraction. It also has the added diversification of a commodities trading business which other rivals do not. This trading or marketing business can, as it has done this time around, generate profits to help offset asset price falls for its more traditional mining business. 

For investors, the suspension of the dividend is a big disappointment. The company has also found itself under investigation regarding its business practices by both US and Swiss authorities. That said, the benefit of its marketing business is today highly evident, while management expectations for debt to be brought back to target by the year-end could therefore see a resumption of dividend payments made relatively quickly. 

Positives: 

• Diverse portfolio of commodities
• Marketing activities offer business diversity

Negatives:

• Dividend payment suspended
• Output for most of its commodities fell in the half-year

The average rating of stock market analysts:

Buy