ii view: energy powers Glencore profits to a record

Diversity of operations, reducing debt and paying out billions in shareholder returns. Buy, sell, or hold?

Full-year 2022 results to 31 December

• Revenue up 26% to $226 billion
• Adjusted profit (EBITDA) up 60% to $34 billion
• Shareholder returns of $7.1 billion comprising $0.44 per share in dividends and $0.12 in share buybacks 
• Net debt of $75 million, down from $6 billion a year ago

Chief executive Gary Nagle said:“The global pandemic, recovery from it and years of underinvestment, followed by conflict in Europe, exposed pre-existing vulnerabilities in energy security and supply chains, underpinning the generally high and volatile 2022 commodity price environment, which enabled the Group to generate record profitability for the year.”

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

ii round-up:

Glencore (LSE:GLEN) today detailed record profit for both its mining and trading or marketing operations buoyed by higher prices for energy products, including coal, as many countries sought alternatives to oil following Russia’s invasion of Ukraine. 

Revenues for FTSE 100 Glencore climbed by just over a quarter to $226 billion (£188 billion), pushing adjusted profit up 60% to $34 billion, and allowing it to pay down net debt to almost zero and return $7.1 billion to shareholders via both dividends and share buybacks. That’s broadly in line with City forecasts. 

Glencore shares were little changed in UK trading having come into this latest news up by around a fifth over the last year, similar to copper miner Antofagasta (LSE:ANTO). Shares for rival Rio Tinto (LSE:RIO) are up by around 6% over that time, about the same as the FTSE 100 index.  

Glencore has operations in more than 35 countries and is both a producer and trader of more than 60 different commodities. 

Energy-related profits for its mining operations rose by more than 200% to $18.6 billion, with a similar profit gain seen for energy at its marketing business. 

Metal-related profit for the mining division, however, fell $2.7 billion due to lower volumes and higher costs, while metal-related marketing profits also retreated, hindered by China's prolonged pandemic lockdowns and increased economic uncertainty given elevated inflation and rising interest rates. 

• 2023 Investment Outlook: stock tips, forecasts, predictions and tax changes
• Where do ISA millionaires invest?

Over the year, net debt fell to $75 million from the prior year’s $6 billion. Shareholder returns total $7.1 billion, comprising $5.6 billion in cash and a new $1.5 billion share buyback programme. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

ii view:

Glencore was started in 1974 and today employs more than 130,000 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. 

• Eight easy ways to boost your ISA returns
• A trio of dividend stocks for income seekers

For investors, a backdrop of elevated inflation, rising interest rates and high tensions between the West and Glencore customer China need to be remembered. Exposure to climate change-responsible fuels, such as coal, warrants consideration. As does potential political instability in countries of operation such as Colombia, the Democratic Republic of the Congo, and Kazakhstan. 

On the upside, the recent reopening of the Chinese economy following the pandemic may help counterbalance any demand weakening in the West. Diversity of both commodities mined and operations, given its marketing business, generate strengths not seen at rivals, while a focus on debt and shareholder returns is evident.  

For now, and with the consensus analyst estimate of fair value per share standing at over 600p per share, investors are unlikely to desert this diversified mining mammoth. 

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