Why Glencore shares now offer 30% upside

The “compelling” case for coal-fired Glencore (LSE:GLEN) shares was today shown in City price targets pointing to potential upsides of more than 30%.

Next year’s likely resumption of top-up shareholder returns has reignited interest, even though yesterday’s half-year results came in short of analysts’ forecast.

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Among the City banks, Goldman Sachs and Citigroup have Buy recommendations and target prices of 520p and 530p respectively. That compares with 398p at lunchtime today.

Their view is shared by many retail investors after back-to-back days when Glencore has been the second-most traded stock on the interactive investor platform.

Glencore last traded near the 530p mark in early 2023, having fallen as far as 368p after February’s annual results included a pause on top-up returns, due to the $6.9 billion acquisition of the steelmaking coal business of Canada’s Teck Resources.

Source: TradingView. Past performance is not a guide to future performance.

The transformational deal completed last month, with Glencore confirming yesterday that following feedback from shareholders it no longer intended to spin off its enlarged coal business via a New York listing.

That decision to continue participating in coal production may deter some potential new investors given the fossil fuel’s role in climate change.

However, Glencore will now use the significant cash flows of the coal business to fund longer-term growth opportunities in its transition metals portfolio, as well as “accelerate and optimise” returns to shareholders.

Its product mix is skewed to later-cycle commodities, including copper, zinc, nickel and cobalt. Glencore believes that supply constraints and energy transition demand leave many of these commodities well-positioned for price appreciation.

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This is in contrast to iron ore, which is not part of the Glencore portfolio and where the price outlook appears more uncertain due to pressures on the Chinese economy.

Highlighting a price target of 520p, UBS published a note today describing the Glencore investment case for 2025 as compelling.

It said: “We have a Buy on Glencore due to its commodity mix (leverage to copper and met-coal price) and growth optionality.

“We see potential for further attractive M&A in the second half of 2024 and expect cash returns (dividend & buy-back) to step up materially from February 2025.”

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Yesterday’s results showed that underlying earnings fell by a bigger-than-expected 33% to $6.3 billion, but with management confident of a stronger second half as volumes recover.

Glencore pointed out yesterday that deleveraging of just £300 million would be required to reach the $10 billion net debt cap under its framework for excess return top-up payments.

This compares to at least $5.3 billion of deleveraging that would have been required under the original demerger scenario. If there’s no M&A activity, UBS sees the potential for cash returns of $3 billion (£2.4 billion) in the 2024 financial year compared with 2023’s $1.6 billion.

Speculation has also focused on the potential for Glencore to use its cash resources to fund further acquisitions, such as the steelmaking coal operations of Anglo American (LSE:AAL).