ii view: Glencore abandons plan to demerge coal assets

First-half results to 30 June

• Revenue up 9% to $117 billion
• Adjusted profit down 33% to $6.33 billion
• Net debt down 26% to $3.6 billion

ii round-up:

Miner and commodity trader Glencore (LSE:GLEN) today abandoned plans to spin off its previously enlarged coal business following discussions with shareholders.

Expanded in 2023 via the $9 billion acquisition of coal operations from Canadian miner Teck Resources Ltd Class B (Sub Voting) (NYSE:TECK), Glencore had originally planned to demerge the coal business under environmental, social and governance (ESG), or climate change considerations. Management and shareholders now believe the company's cash-generating ability should be used to fund transition metal acquisition opportunities and provide for shareholder returns. 

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Adjusted first-half profit fell a third year-over-year to $6.33 billion as energy markets and the price of coal normalised following the previous spike in oil and Russia’s invasion of Ukraine. 

Shares in the FTSE 100 miner rose 1% in UK trading having come into these latest results down by close to a fifth year to date. That’s similar to fellow diversified miners BHP Group Ltd (LSE:BHP) and Rio Tinto Registered Shares (LSE:RIO) and is set against the backdrop of recessionary concerns for both the US and China. The FTSE 100 index is up just under 5% in 2024. 

Glencore has operations in over 35 countries and is both a producer and trader of more than 60 different commodities. Profits for mining or industrial assets fell 39%, largely given a $2.7 billion reduction in thermal coal earnings. Trading or marketing profits retreated 16% to $1.5 billion. 

Buoyant cash generation during the half-year aided a 26% decline in group net debt to $3.6 billion. Shareholder returns totalled $1 billion during the period. Glencore, and following the decision to keep coal mining, is now optimistic about potential future top-up shareholder returns above its base cash distribution in February 2025.  

A reported loss attributable to shareholders for the period came in at $233 million, down from a profit of $4.5 billion in H1 2023, not helped by $1.5 billion of exceptional items.

A previously announced total dividend for 2024 of $0.13 per share is payable in two instalments. The second interim dividend of $0.065 is due to be paid on 29 September. That’s down from a total of $0.52 per share in 2023. 

A third-quarter production update is expected 30 October.  

ii view:

Established in 1974, Glencore customers today range from car makers to steel, power generation and battery manufacturing companies. Employing over 150,000 people, industrial or mining related profits dominate, with marketing or trading profits coming in at around a fifth. Geographically, Asia during 2023 generated its biggest slug of sales at 44%, followed by Europe at 29%, the Americas 20%, Africa 5%, and Oceania the balance of 2%.  

For investors, Glencore’s decision to continue participating in coal production may now deter some potential new investors given its role in climate change. Recessionary concerns around major market China are not to forgotten. Previous corruption allegations and legal settlements add to ethical concerns, while exposure to political instability in countries of operation such as Colombia, the Democratic Republic of the Congo and Kazakhstan also warrant consideration.

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On the upside, its diversity of operations is enhanced following the decision to retain the coal business. Cost savings from the previous Teck acquisition are likely to be ongoing. Both a mining and marketing business offer operational diversity not seen at rivals such as Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES). China continues to implement measures to try and boost its economy, while exposure to energy transition metals such as copper, cobalt and zinc used in batteries persists and is likely to be enhanced given boosted cashflows to fund possible acquisitions.     

In all, and while increased ESG considerations will potentially deter some investors, a consensus analyst estimate of fair value above 500p per share will likely make the shares attractive to others.

Positives: 

• Diversity of commodities and operations
• Robust balance sheet

Negatives:

• Uncertain economic outlook
• The weather can hinder performance

The average rating of stock market analysts:

Buy