Glencore shares hit as profit halves and dividend disappoints

Pressure on Glencore (LSE:GLEN) shares continued today amid disappointment over first-half earnings and the size of the mining giant’s September “top-up” dividend payment.

The stock fell 18.85p to 437.85p, which compares with the record high of 580p seen in January before valuations in the sector were hit by China-led economic weakness.

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A combination of lower commodity prices, higher costs and some operating issues meant Glencore’s underlying earnings fell 50% year-on-year to $9.4 billion (£7.4 billion), at least 6% short of analysts’ expectations.

Its plans for top–up capital returns through share buybacks and dividend payments totalling $2.2 billion (£1.7 billion) contrasted with City hopes in the range of $2 billion-£3 billion (£1.6 billion-£2.4 billion).

The returns include a $1 billion (£790 million) special dividend of $0.08 a share, which will be paid on 22 September alongside the base $0.22 announced in February’s 2022 results.

A new $1.2 billion (£940 million) buyback is also intended to run until the 2023 annual results, lifting total returns this year to about $9.3 billion (£7.3 billion).

But if Glencore’s attempt to buy Teck’s steelmaking coal business is unsuccessful, the $2 billion (£1.6 billion) reserved for this purchase will be returned to shareholders.

Glencore’s optimal net debt level is $10 billion but deleveraging below this cap is periodically returned to shareholders via special distributions and buybacks.

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Despite disappointment in some quarters over the earnings and top-up distribution, at least three City banks reiterated their “buy” recommendations following the results.

They include Deutsche Bank, which stuck with a target price of 560p as it expects more predictable trading conditions following the volatility triggered by the pandemic.

Jefferies, which has been at 550p, added that it continues to like Glencore’s commodity mix, valuation and aggressive approach to “strategically sensible and value-enhancing M&A”.

The US bank notes that Glencore’s production is expected to increase in the second half and that costs should stabilise. It added: “Range bound volatility in commodity prices with near-term downside risk won't help, but the medium/longer-term outlook for Glencore's earnings, cash flow and capital returns is positive, in our view.”

Without higher commodity prices, however, the bank warns that capital returns are likely to be lower going forward.

Jefferies said: “We believe that Glencore is shifting from a yield play to more of a levered play on the cycle. The story last year was that flat prices would be good enough for Glencore shareholders. Now, higher commodity prices (or compelling M&A) may be needed for these shares to break out of the recent trading range.”

The first-half performance by Glencore included earnings of $7.4 billion (£5.8 billion) by the company's industrial assets, which include copper, zinc, nickel and coal mining. Despite materially lower energy prices and cost headwinds, this was the second highest first-half performance in the company’s history after 2022’s $15 billion result.

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The marketing segment’s earnings of $1.8 billion (£1.4 billion) were 52% lower than 2022’s period of extreme price volatility, but still above the long-term guidance range.

Glencore said it was directing most of its capital expenditure, in large part funded through the earnings of its energy business, towards development of its transition metals portfolio.Recent investment commitments worth $1.25 billion (£8.8 billion) include the balance of the large, long-life Mara copper project in Argentina and a minority stake in the Alunorte alumina refinery.

A more transformational deal involved April’s proposal to Canada’s Teck for the pair to split their combined coal and metals operations into two standalone companies.

This was rejected by Teck but Glencore remains interested in a deal that would lead to an eventual New York demerger of a combined coal and carbon steel materials business.