Resource powerhouse Glencore (LSE: GLEN) has chalked up the best performance of any FTSE 100 company over the past two years.
Since the beginning of 2016, the stock has added nearly 370%, excluding dividends, thanks to management’s efforts in turning the business around.
Indeed, it was only a few years ago that City analysts were expressing concern about the group’s balance sheet and questioning whether or not it had the financial capacity to survive. Throughout this debate, management remained positive, And it seems they were on the right track as today, Glencore is stronger and more profitable than ever.
Profits exploding
According to a trading update issued by the company earlier this week, management now expects earnings from the group’s trading arm to be in the top half of a $2.2bn-$3.2bn range, primarily thanks to problems in the rest of the mining industry.
Over the past decade, the mining industry has been on a roller-coaster ride. Grom boom to bust and now boom again, miners have been forced to repeatedly change their objectives as commodity prices have whipsawed. Glencore has been able to use its global presence and reputation to make the most of this by taking advantage of arbitrage opportunities with supply and demand. Cuts to capital spending have curtailed commodity production in some regions, while output has grown in others, allowing traders to profit off the difference.
But there’s more to Glencore than the trading business. The group is also one of the world’s largest suppliers of coal, copper, zinc and cobalt, the demand for which should only grow as the world’s population becomes more connected.
That being said, it’s not all plain sailing for the business. Last month, it emerged that one of the company’s partners, an Israeli businessman named Dan Gertler, launched legal action against the group seeking almost $3bn of damages from Glencore after accusing it of “draining” money from a joint venture. The situation has only become more complicated by the fact that Gertler is subject to US sanctions.
Long term buy
Despite this setback, I believe that the Glencore share price remains one of the best buys in the FTSE 100 today.
The company is, in my opinion, a great play on global economic growth and the demand for commodities that will come as a result. What’s more, as we have seen over the past three years, the business’s management is exceptionally committed and skilled, partly because they own a significant chunk of the company.
CEO Ivan Glasenberg estimates the firm is on track to generate around $10bn of free cash flow in 2018, which could be used to fund deals or returned to shareholders if no suitable acquisitions are found.
Whatever the company chooses to do with this cash, I’m almost certain it will generate value for investors. A deal to acquire another commodity behemoth (Rio Tinto has been touted as a possible target in the past) would cement the business’s position as the world’s premier commodity group.
