Mining Giant Glencore Has 2 Ways to Win
Mining and commodities trading giant Glencore was one of the FTSE 100’s top performers last year, and it could be set to repeat the trick in 2023.
Glencore (ticker: GLEN.UK) was the third-best performing stock in 2022, behind defense giant BAE Systems (BA.UK) and publisher Pearson (PSO), climbing 47%, largely driven by record thermal coal prices.
The miner’s exposure to coal is also what makes it an attractive proposition in 2023, while China’s reopening should push metals prices higher, adding to Glencore’s upside. Over the longer term, its status as one of the world’s leading producers and marketers of copper leaves it well placed to benefit from the global transition toward greener energy.
Record coal prices, largely a result of Russia’s invasion of Ukraine, and a subsequent natural-gas shortage helped Glencore’s earnings jump by $10 billion to a record $18.9 billion in the six months to June 2022. The company said around $8 billion of that increase came from its coal business. With coal prices remaining high, Glencore’s full-year earnings next month could be another catalyst for the stock.
Glencore is winding down its coal assets. The company described its policy as a “responsibly managed decline and stewardship of our coal business” at an investor day last month.
“Glencore’s sticking by thermal coal has proven to be a major advantage over its peers,” Liberum analyst Ben Davis says. He adds that “prices have the potential to remain elevated far above marginal cost of production in the long term.” Davis has a Buy rating on the stock with a 6.70 pound sterling ($8.17) target price, 23% above Monday’s price. The stock is up 10% since this column last wrote about the company in mid-August.
The policy has led to some environmental, social, and governance, or ESG, concerns, with a number of institutional investors filing a shareholder resolution earlier this month asking Glencore to explain how it fits in with the Paris Agreement and its own net-zero commitment. Glencore said it will publish its next climate report in March to update on progress since its 2020 strategy.
At the other end of the ESG scale, Glencore continues to invest in what it calls “key transition metals” such as copper, nickel, and cobalt, which it says will support global decarbonization.
“Glencore’s copper and cobalt exposure remains attractive in the long term, and the near-term upside offered by thermal coal more than offsets the long-term outlook at this point,” BMO Capital Markets analyst Alexander Pearce says. He has an Outperform rating on the stock, with a £6.50 target price.
The company announced “top up” returns of $4.5 billion in the first half of 2022, through a special dividend and a $3 billion share buyback program. In keeping with Glencore’s strategy to return surplus capital to investors, there could be more to come. “This narrative could build up in the stock going into the full-year earnings,” Citi analysts said last month. They have a Buy rating and a £7 price target.
China’s reopening, as it shifts away from its zero-Covid policy, should also benefit miners, though for how long is less certain. J.P. Morgan analysts note that the risks mount into the second and third quarters, citing potential Covid spikes and weaker iron ore seasonality. Glencore is one of the bank’s top mining picks to play China’s reopening.
Despite its bumper year of gains, the stock still looks cheap, trading at 6.5 times 2023 earnings estimates, below the industry average of 11 times, according to FactSet data. While Glencore is somewhat at the mercy of commodities prices, there’s enough to suggest that this undervalued stock is worth digging into.