The Glencore (LSE: GLEN) share price has lagged most of its FTSE 100 mining rivals this year, as the group’s reputation has taken a hammering.
I think the shares look reasonably priced at current levels. But for investors focused on maximising income, I think there may be better choices elsewhere.
What’s wrong at Glencore?
One reason that Glencore shares are under pressure is that the company is currently the subject of several corruption investigations. In the US, two investigations are under way into possible corrupt practices in the Swiss-based company’s overseas operations. Both are thought to relate to activities in Nigeria and the Democratic Republic of Congo.
The company is also being investigated by authorities in Brazil, in connection with possible bribery offences connected to state oil group Petrobras. And in December, a former employee was fined $1.8m by Canadian regulators.
Will these investigations cause lasting damage to the Glencore business? Probably not, in my view. But I suspect these reputational issues could result in some major investors avoiding the shares for the time being.
A dirty bargain?
Another potential concern for Glencore shareholders is the group’s focus on coal, which generated about one third of profits last year. A growing number of major investors are avoiding companies that produce coal, due to environmental concerns.
My view on this is that coal will remain an important source of profits for Glencore for the foreseeable future. Demand for the black stuff isn’t likely to disappear for decades. But this focus on ‘dirty energy’ could limit the stock’s valuation gains, as the market may price in environmental costs and the risk of future decline.
At about 310p, Glencore shares trade on 11 times 2019 forecast earnings and offer a 4.8% dividend yield. I’d rate the shares as a hold at this level, but for income investors I think there may be better options.
This 8% yield looks tempting
One company that has outperformed Glencore in recent years is coal and steel group Evraz (LSE: EVR). The Evraz share price has gained 41% over the last year, compared to a 10% fall for Glencore shares.
Although it’s based in Russia, Evraz operates in North America as well as Russia and Ukraine. A simplified view of the business is that it operates coal and iron ore mines in Russia and Ukraine. These supply the raw materials needed for steelmaking, much of which takes place in North America.
This group’s low cost mines and attractive scale mean that it generates a lot of cash. In 2018, Evraz reported free cash flow of $1,940m from total revenue of $12,836m. That represents a free cash flow yield of 16%, a very impressive figure.
Most of this spare cash was returned to shareholders, which paid dividends totalling $1,600m last year. At the current share price, that gives a dividend yield of 14%.
An income buy?
Evraz is what I call an oligarch stock. About 60% of the shares are controlled by three rich Russians, including Chelsea FC owner Roman Abramovich. My view is that such people own assets like this to provide them with income and a safe home for their cash.
For this reason, I think the firm’s focus on cash returns will continue. For investors who are happy investing in Russia, I think the shares could be a buy.
