ii view: Glencore trading confidence counters mining misses

A diversity of operations and a proposed deal with fellow Canadian coal miner Teck Resources. We assess prospects. 

First-quarter production update to 31 March

• Coal production fell 6% to 26.9 Mt
• Copper production fell 5% year-over-year to 244 Kt
• Cobalt rose 8% to 10.5 Kt

Chief executive Gary Nagle said:

"First quarter production was broadly in line with our expectations, accounting for portfolio changes and operational conditions, including the disposals / closures of some zinc and lead mines in the Americas during 2022. Full year production guidance is unchanged from that presented at Glencore's investor presentation in December 2022.”

ii round-up:

Mining giant Glencore (LSE:GLEN) has flagged confidence in its commodity trading marketing division but detailed first-quarter production output broadly shy of City estimates. 

The FTSE 100 miner now expects full-year adjusted marketing profit to come in ahead of its prior $3.2 billion forecast, but with production for commodities including coal, copper and nickel all below analyst hopes given varying operational issues including adverse weather. 

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Glencore shares fell over 1% in UK trading having come into this latest news down around 10% year-to-date. That’s similar to fellow diversified miner Rio Tinto Registered Shares (LSE:RIO) and in contrast to a 6% gain for the 100 index during 2023. 

Glencore has operations in over 35 countries. It is both a producer and trader of more than 60 different commodities including fossil fuel coal, now seen as a contributor towards climate change. 

In early April, it proposed a merger/demerger plan with fellow Canadian metals and coal miner Teck Resources Ltd Class B (NYSE:TECK). The plan would see the pair combine and then simultaneously split their combined coal and metals operations into two standalone companies.

• Can Glencore tempt Teck Resources by sweetening $23bn bid?

Coal production for Glencore, which accounts for around two-fifths of adjusted profit, fell 6% year-over-year to 26.9 million tonnes (Mt) during the first quarter, hindered by a community blockade at Cerrejón in Columbia and below City forecasts nearer to 28 Mt. 

Nickel production, a metal used in battery production, fell by a third from the first quarter last year to 20.9 kilo tonnes (Kt), shy of analyst hopes nearer to 26 Kt. 

Despite the shortfalls, Glencore retained its full-year production estimates for each of its commodities, given optimism in improving output later in the year. 

Broker Morgan Stanley retained its ‘overweight’ stance on the shares post the update.  

ii view:

Glencore was started in 1974 and today employs around 140,000 people. Its products include copper, zinc, nickel, cobalt, and coal, while it is also a global trader of oil and agricultural products. Glencore customers include industrial consumers, such as those in the automotive, steel, power generation, battery manufacturing and oil sectors. Its trading or marketing business adds additional diversity not seen at rivals. The marketing business can generate profits to help offset commodity price falls for its more traditional mining business. 

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For investors, exposure to coal may be deterring some investors from buying Glencore shares. Previous corruption allegations and legal settlements potentially add to ethical concerns. Exposure to political instability in countries of operation such as Colombia, Democratic Republic of the Congo or Kazakhstan warrant consideration, as do increasingly strained relations between the West and big commodity buyer China. 

On the upside, its proposed deal with Teck Resources of Canada could see its coal operations effectively separated out, leaving investors with a clearer choice as to whether to stay invested in coal or not. Diversity of both commodities mined and operations, given its marketing business, generate strengths not seen at rivals. Exposure to energy transition metals such as zinc is not to be ignored, while a focus on debt and shareholder returns is ongoing.  

On balance, and while ethical concerns and exposure to economic outlook uncertainty should not be forgotten, a forecast future dividend yield of over 7% is likely to keep income investors sitting tight. 

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