The Glencore (LSE: GLEN) share price has performed very well in the past year. It rose about 125% and comfortably outperformed the broader FTSE 100 index, which rose about 25% in the same period.
As an investor, I would like to understand what the future holds for this company.
The bull case for Glencore’s shares
Glencore has been a cash-generative business. I personally like companies with good free cash flows. The low production costs have helped the company to reap good profits. For example, the company’s strong profits in the copper division were helped by the successful ramp-up of Katanga mines. Also, higher copper prices helped the company to realise better prices in the market. The strong demand from China led to the recovery of global copper prices in the latter half of 2020.
The company’s full-year results were good. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) came flat at $11.6bn, in spite of disruptions from the Covid-19. The company has a diversified business, the weaker energy contribution was offset by the marketing and metal segments profits. The free cash flow was $4.3bn. The management expects annualised EBITDA of $16bn and a free cash flow of $7.2bn, calculated at January end prices.
Glencore has the reputation of being one of the leading commodity traders in the world. It supplies raw materials to every industry like automotive, energy, food, construction and technology, among others. This makes its products recession-proof. The company might also benefit from the Electric Vehicles (EV) boom – it is already in talks to supply raw materials for batteries in EVs.
The company has a stable balance sheet. The net debt has been reduced by 10% to $15.8bn. Going forward, the management plans to reduce the net debt to about $13bn, by the end of this year.
The bear case for Glencore’s share price
The mining industry is capital intensive. So, even in the case of Glencore, it has to continuously invest in various new mines. A point to consider is that not all the mines will be profitable. Another concern is that the end-market requirements might change rapidly due to technological advancements. So, in this case, the metal might have only had short-term demand.
Next, Glencore has to comply with various regulations. These are time-consuming and will lead to additional costs. Also, it operates in various developing countries. It has to constantly negotiate with the governments there. In the past, the company was charged with financial irregularities and accused of bribing. I would be extra cautious before investing in such a company.
Lastly, large fund investments will play a major role in the share performance. For example, Norway’s $1tn wealth fund has excluded companies like Glencore from its holdings due to coal productions. If other funds follow the same policies then this could negatively impact Glencore’s share price.
The company has a good financial position. Not only that, it has about five decades of experience in the global commodities industry. However, I am not a buyer of the shares now. I would prefer another mining stock, whose revenue growth is better. So, for now, Glencore will only be on my watch list.
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Royston Roche 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.