Interactive Investor

Mining industry bonanza for shareholders

5th August 2021 13:56

Graeme Evans from interactive investor

Commodities giant Glencore has reported a big turnaround in its fortunes.

The bonanza for shareholders in the mining industry continued today as Glencore (LSE:GLEN) promised returns of $2.8 billion (£2 billion) just a year after scrapping its dividend to focus on debt reduction.

The rapid turnaround in fortunes comes on the back of prices for most of its commodities hitting multi-year highs amid accelerating demand and lingering supply constraints.

Glencore delivered record underlying earnings of $8.7 billion (£6.25 billion) for the first half of the year, triggering shareholder returns of some $1.2 billion for the period and including 0.04 cents a share or $530 million (£380.8 million) for payment in September.

The remainder is made up of a $650 million (£467.1 million) share buyback due to be completed by February's annual results, on top of the $1.6 billion (£1.15 billion) declared earlier this year.

Shareholders received 0.06 cents in May and are due to receive the same again in September.

The scale of the company's recent transformation is shown by net debt now being towards the low end of its $10 billion to $16 billion (£7.2 billion-£11.5 billion) range, compared with $15.8 billion (£11.3 billion) at the start of the year.

This time last year, the impact of the pandemic prompted Glencore to scrap its dividend in favour of reducing debt, which had risen to over $19 billion (£13.65 billion).

Since then, fiscal and monetary stimulus, vaccine roll-outs and increasing momentum in relation to decarbonisation of energy systems have underpinned sector sentiment.

Average prices for its key commodities’ benchmarks are up about 40% year-on-year, with thermal coal and copper even higher at about 60%.

Nickel, which is the heaviest component of a lithium ion battery, rose 40% amid strong demand from electric vehicle manufacturers and China's stainless steel industry.

Glencore is a leading producer and marketer of nickel, with assets in Australia, Canada and Europe.

Cobalt, which is another key battery component, rose 38% in the half-year and is likely to benefit from further demand as the aerospace sector ramps up activity later this year.

The company produces cobalt mainly as a by-product of copper mining in the Democratic Republic of Congo, but also as a by-product of nickel mining.

Mining operations are supplemented by its marketing division, dubbed the DHL of the metal market and which delivered better-than-expected earnings of $1.8 billion (£1.3 billion) in the first half.

Glencore's spread of commodities particularly appeals to mining analyst John Meyer, who compares the company's prospects favourably with Rio Tinto (LSE:RIO) and other iron ore heavyweights that might be more unsettled by China's recent efforts to control industry prices.

The SP Angel analyst told interactive investor last month that Glencore looked to be well placed: “They’ve got a very good mix of base metals and they’re pretty quick at getting into new areas.

“So for me, I think Glencore is likely to have a better time of it and I’m quite interested to see how that performs and I think it will do well.”

Glencore shares fell back 2% or 5.35p to 323.95p after today's results, having been trading at their highest level in almost three years.

Morgan Stanley said today's results were in line with expectations, but with total capital returns slightly ahead of hopes.

They said potential asset sales or an exit from coal could help to crystallise shareholder value, through balance sheet deleveraging or a boost to the valuation multiple from the boost to Glencore's environmental, social, and governance (ESG) credentials.

In a strong period for mining industry payouts, Rio Tinto recently announced the award of a record $9.1 billion (£6.5 billion) in dividends and Anglo American $4.1 billion (£2.95 billion).

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