Is Glencore’s low share price a bargain or a trap?

Glencore plc (LON: GLEN) shares are down 20% in two months. Is it time to load up?

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Commodity giant Glencore (LSE: GLEN) appears to be a very popular stock right now. Indeed, according to Hargreaves Lansdown, it was the second most purchased stock on its platform last week by deal size, representing 3.6% of all shares bought. It was a similar story over at Barclays, with GLEN also being the second most purchased stock for the week. So should you follow the herd and invest in the £44bn market-cap mining company?

Share price fall

Glencore shares have experienced a dramatic decline over the last two months, falling over 20%. As a result, the shares do appear to offer value at present. For example, with City analysts expecting the group to generate earnings of $0.49 this year, the stock currently trades on a forward P/E ratio of just 8.1 which is considerably lower than the median FTSE 100 forward P/E of 13.9. There also appears to be appeal from a dividend-investing perspective, with the stock offering a prospective yield of 5.3%.

When you consider that the company’s performance in 2017 was its “strongest on record” according to CEO Ivan Glasenberg and that analysts expect revenue and earnings to jump 13.4% and 19.5% respectively this year, those metrics certainly look attractive. However, before you load up on Glencore shares, you need to be aware of the risks.

A large part of the reason the shares have fallen recently is that in early July, the group was hit with a subpoena from the US Department of Justice (DoJ) concerning an investigation into possible money laundering across its operations in Nigeria, the Democratic Republic of Congo and Venezuela. The DoJ wants to see documents and records on compliance with the Foreign Corrupt Practices Act and US money laundering statutes dating as far back as 2007.

It’s still early days as far as the investigation from the DoJ goes and so it’s hard to get a reading on the implications here. However, given the uncertainty that has arisen as a result of the subpoena, I personally believe it’s sensible to avoid Glencore shares for now.

A safer mining stock?

If commodity companies interest you, you might want to take a look at Rio Tinto (LSE: RIO) instead of Glencore. Its share price has also retreated recently, meaning there’s a high dividend yield on offer at present.

Rio reported half-year results in early August and there was good news for investors, with the company announcing that shareholders are set to receive extra returns in the near future as a result of asset disposals. For the six months to 30 June, underlying earnings per share rose 16%, which resulted in a 15% increase in the interim dividend.

Looking at consensus forecasts, City analysts currently expect RIO to generate earnings per share of $4.82 this year and pay a dividend of $2.88 per share. At the current share price, those figures equate to a forward P/E of 9.9 and a prospective yield of 6%. These metrics look quite attractive, in my view. Having said that, it’s important to realise that mining is a highly cyclical business, so dividends are far from guaranteed.

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.

Edward Sheldon has no position in any 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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