I think Glencore (LSE: GLEN) stock has tremendous potential over the next few years. As the world starts to rebuild from the pandemic, the demand for essential commodities such as copper and iron ore is rising.
As the world’s largest commodity trader and one of the world’s largest mining groups, the Switzerland-based enterprise has plenty of scope to capitalise on these trends.
Growth potential
We don’t have to look far to find evidence to support the conclusion that Glencore is currently operating in a very favourable environment.
Over the past year, the price of copper has increased in value by around 55%. At one point, it was up nearly 90% year-on-year. Glencore is a large copper producer. Management expects demand for the metal to continue to grow in the years ahead.
In an interview in May, CEO Ivan Glasenberg claimed that the price of copper needs to jump a further 50%. That would be enough to encourage new supply to meet the projected demand from the global green energy revolution, he argued.
And while the green energy industry is gobbling up copper, the thermal coal industry is also experiencing some sort of a renaissance. The price of the fossil fuel has hit its highest level in a decade on strong demand from Asia and a lack of investment in new supply.
Unlike other miners, which have decided to exit the coal market due to pressure to reduce emissions, Glencore sees value. It recently announced a deal to acquire its partners’ interests in one of the world’s biggest open-pit thermal coal mines. This deal will boost the company’s thermal coal production to about 125m tonnes this year, from earlier guidance of 110m tonnes.
Glencore stock risks
With its exposure to thermal coal, Glencore stock might not be suitable for all investors. Its environmental credentials are pretty poor. What’s more, the mining industry, in general, has a pretty poor reputation for environmental, social and governance factors.
There’s also a risk that the company may end up holding on to a portfolio of thermal coal assets which have no real value. They might have a negative value as Glencore would be responsible for cleaning up the pits when their lives end.
These are some of the most significant risks hanging over Glencore stock right now. However, it’s clear the global demand for commodities is increasing. As such, I think the company’s prospects overall are incredibly encouraging.
That brings me onto valuation. At the current share price of 310p, Glencore stock is selling at a forward price-to-earnings (P/E) multiple of 9.1. I think that looks incredibly cheap compared to its growth potential over the next few years. In addition, City analysts have pencilled in a dividend yield of 4.2% for the year ahead.
While I appreciate this investment might not be suitable for all investors, I’m encouraged by the outlook for Glencore stock and the company’s valuation. That’s why I’d buy the shares for my portfolio today.
