3 Reasons To Own Glencore Xstrata PLC

Glencore Xstrata PLC (LON:GLEN) has posted good results, but its long-term position is more exciting.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

opencast.miningMining and commodities trading giant Glencore Xstrata (LSE: GLEN) has modestly surprised the market with better-than-expected numbers in its latest full-year results.

Improved cost management and better synergies from its recent acquisition Xstrata helped offset some of the weakness in commodity pricing we’ve seen in the past year or two, while stronger production figures – especially for copper, where output increased 26% to 1.5million tonnes – also boosted its top and bottom line.

However even these full-year results only hint at what I believe is the long-term argument for owning these shares.

Here are three reasons why the shares currently have a place in my portfolio.

1. Improving efficiency and capital management

As is normally the case, the mining industry did not cover itself in glory during the last commodity boom. Numerous expensive acquisitions and speculative new projects have had to be written down in value after the cycle turned. And company management – in many cases new management, after the old leaders were ousted – has subsequently struggled to wring costs out of their businesses without incurring even more financial pain.

While Glencore was not the worst offender in the boom years, you’re still getting some of the benefits of this fresh air breathing through the sector by owning the shares today, most notably thanks to its full acquisition of its fellow mining giant Xstrata.

The company now says it has identified $2.4 billion in annual savings from the merger, which was formally completed last May. That’s more than expected and enough to move the dial every year, even for a £44 billion mega-mining giant.

True, Glencore took a massive $7.5 billion impairment charge on the merger, but that reflected more the weakness in the wider sector. Besides, it’s a paper charge – the actual financial outlay is long since done and dusted. New investors in the shares are more interested in where the company is going from here, and on a pro-forma basis Glencore says its cash flow was steady between 2012 and 2013, reflecting its operational strength.

Even its scary $36bn net debt figure needs to be seen in this light. The company is coming to the end of several large projects, and says capital expenditure is on a “steeply declining trajectory”.

Assuming commodity prices don’t lurch even lower, the benefits of all this expenditure coming out of the business should start to flow through in future years.

2. Insider ownership

One reason to have confidence that management really is interested in delivering shareholder value is that unlike its fellow UK behemoths in the mining sector, Glencore Xstrata has significant insider ownership.

Around a quarter of the company is owned by staff and directors. Most significantly, CEO Ivan Glasenberg owns an 8.3% stake in the company, and other key figures also retained big holdings following the company’s IPO in May 2011.

Admittedly, the share price is still much lower than the heights it hit shortly after it floated, so insider ownership is hardly a guarantee of a strong performance in the price of the shares.

But it does give me more faith that management will look to make decisions that deliver shareholder value, rather than just expand the Glencore empire for the sake of executive ego. I’m sure Glasenberg has plenty of ego, but I think his big holding – which just delivered a $183 million dividend for him, after all – should override any desire to justify a bigger pay packet through needless conquest.

I even see that high flotation price as a positive. It wasn’t great for those who bought into the hype, but it did prove Glencore’s traders could call the top of a market.

In the future they’ll be doing that for all shareholders’ benefit.

3. Stealthy creation of a soft commodity giant

A third reason for owning Glencore has nothing to do with metals, coal, oil or the other commodities we think of when it comes to big London miners.

Rather, it’s for its exposure to soft commodities, which I think could be a massively important business in the future. Soft commodities are basically those that grow – think wheat, corn, pork, timber and the like. They’re renewable, unlike metals, but equally the world’s growing population has an ever greater appetite for them, too.

Following its acquisition of Canadian grain handling giant Viterra in early 2013, Glencore is the only one of its peers with significant exposure to this crucially important sector. This sector was a laggard in 2013, but I think agriculture will only get more important in the years ahead. The commodities business is all about scale (the clue is in the name!) and few have the scale to match Glencore Xstrata.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Owain owns shares in Glencore Xstrata.

More on Company Comment

Hand of person putting wood cube block with word VALUE on wooden table
Company Comment

Value has been building behind the Diageo share price

Despite the business growing, the Diageo share price first reached its current level just over 19 months ago and hasn't…

Read more »

Older couple walking in park
Investing Articles

5 stocks to buy for high and rising dividend income

I can see a host of shares to buy on the FTSE 100 offering me exceptional levels of income. Here…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I don’t care if FTSE 100 shares fall further, I’m buying them today

I'm happy to go shopping for FTSE 100 shares today, even though I accept that they could have further to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Rolls-Royce shares are down 18% in a month and I’m finally going to buy them

Investors who bought Rolls-Royce shares have been repeatedly disappointed, but I'm willing to take a chance on them before they…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

How I’d invest £10k in a Stocks and Shares ISA today

Now looks like a good time to buy cheap FTSE 100 shares inside a Stocks and Shares ISA. These are…

Read more »

Black father holding daughter in a field of cows
Investing Articles

Today’s financial crisis is the perfect moment to buy cheap shares

I'm building a portfolio of FTSE 100 stocks by purchasing cheap shares whenever I see an opportunity. There's a good…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

I’d buy Tesco shares in October to bag their 5.4% yield 

Tesco shares have fallen lately but I think this makes them attractively valued for a dividend stock I would aim…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

I would do anything to hold Diageo in my portfolio (but I won’t do that)

Diageo is one of my favourite stocks on the entire FTSE 100 and I'd love to hold it, but one…

Read more »