Glencore (LSE:GLEN) is a large commodity and mining company. It ranks globally as one of the largest companies. This sometimes can be a problem for investors like myself. Such large institutions can be cumbersome and slow moving in the market. This can see them left behind by smaller and more nimble competitors. Yet in this case, I think Glencore is doing well and so I’m considering buying shares. Here’s why.
Strong results give optimism
Glencore splits its operations mainly into two groups. These are the metals and mining segment and the energy products division. Metals and mining is significantly larger in scope and accounts for the bulk of earnings for the company.
It’s this part of the business that really drove strong H1 2021 results. Glencore delivered an adjusted EBITDA profit of $8.7bn. This is an exceptional figure at both a relative and absolute level.
At a relative level, this profit was up 79% on the same period last year. At an absolute level, this profit is larger than some FTSE 100 companies turned over as revenue (let alone a profit measure) during the period!
The business commented that the main drivers behind this included higher commodity prices. Also, favorable cost structures helped, along with a better commercial environment to sell the end outputs to.
When I take a look at Glencore shares though, they are only up 3% over the past six months, albeit up 83% over the past year. So are they a good buy based on the fundamentals? I think so.
Why I like Glencore shares
The strong results give me a positive outlook for the future. I agree that some of this was purely down to commodity prices, but then again, I don’t see why commodity prices can’t increase further.
For example, I think oil can move higher this year due to higher end demand from areas such as cars and aviation. For metals including copper, the key consumer (China) seems to continue to show economic growth. When you add into the mix potential supply disruptions due to Covid-19 in South America, the copper price could easily keep moving higher.
Aside from commodity prices, I like Glencore due to the reduction in levels of debt. My colleague Manika Premsingh flagged this up in a recent article. The net-debt-to-earnings ratio has decreased to 0.7%, half the level from the end of 2020. Given concern over higher inflation leading to higher interest rates, companies with low levels of debt should be least impacted. This puts Glencore shares in a positive light for me.
There are risks though. Glencore is unlikely to be on the watch list of ESG investors given the nature of its mining business. This could hamper share price growth in the long run. Further, the company does have a history of scandals. At the moment, it faces another bribery investigation over operations in the DRC. These could all weigh heavily on Glencore shares.
But overall, I’m considering buying Glencore shares at the moment to benefit from its continued strength looking forward.
