Why the Glencore share price could smash the FTSE 100 this year

Roland Head explains why FTSE 100 (INDEXFTSE:UKX) miner Glencore plc (LON:GLEN) could be a dividend performer.

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FTSE 100 mining giant Glencore (LSE: GLEN) has seen its share price battered recently, thanks to concerns about the firm’s assets in the Democratic Republic of Congo. However, today’s first-quarter update reassured investors that production was “largely in line across all commodity groups.”

Even better was news that full-year operating profit from the group’s commodity trading division is expected to be “within the top half of the $2.2 billion to $3.2 billion long-term guidance range”.

What does this mean for shareholders?

Glencore is battling against attempts to freeze some of its copper and cobalt assets in the DRC. The group runs the risk of losing its mining licences without compensation and is also facing a $3bn claim for damages from a former business partner.

But the firm’s founder and chief executive Ivan Glasenberg is a tough negotiator who is used to the rough and tumble of mining in Africa. And the group’s DRC assets only represent a part of its portfolio, which spans several continents.

Today’s quarterly update suggests that most areas of the business are in good health. When compared to the first quarter of 2017, copper production was 21,300 tonnes higher, at 345,400 tonnes. Zinc and coal production were largely unchanged, and nickel production rose by 21% to 30,100 tonnes.

An income buy?

Overall guidance for the year was left unchanged by today’s first-quarter figures. Based on analysts’ forecasts, this puts the stock on a 2018 forward P/E of 10 with a prospective dividend yield of 4.5%.

This payout should be covered twice by forecast earnings. Once again, the group’s trading division appears to be proving its value by providing strong profits in varying market conditions.

I share my Foolish colleague Harvey Jones’ view that Glencore could be a buy for income. But I don’t think it’s the only quality dividend stock in the mining sector.

A family affair

FTSE 100 companies with controlling family shareholders are fairly rare. One exception is copper miner Antofagasta (LSE: ANTO. This Chile-based mining group is controlled by the Luksic family, which has a 65% stake in the firm.

I’m quite keen on family-run firms as they’re often managed with a long-term view and a conservative approach to debt. Antofagasta is a good example. The group had net debt of just $1.1bn at the end of 2016 and reduced this figure to $456m during 2017.

Low costs, high profits

Cash costs at the firm’s copper and gold mines are among the lowest in the sector, supporting very high profit margins. Even in 2016, when the price of copper was low, the firm managed an operating profit margin of nearly 10%. When the price of copper rose in 2017, this profit margin rose to 40%.

First-quarter trading was in line with expectations and copper production is expected to rise by up to 5% this year. Analysts expect profits to rise by about 8% this year to $816m, or $0.82 per share.

This puts the stock on a forecast P/E of 16 with a prospective yield of 2.7%. Although this might not seem cheap, I believe it could be good value for such a profitable and well-financed business.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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