My income portfolio has been light on mining stocks for some years now. This has been to the detriment of my wealth, as profits, share prices, and dividends across the industry have all boomed in recent years. So I’ve been rectifying that over the past few months, and my latest buy is Glencore (LSE:GLEN) stock. Here’s why.
Full-year results
Yesterday, the miner reported that its 2022 copper production fell 12% year on year to 1.06m tonnes. That was after the company struggled with geotechnical issues at its Katanga mine in the Democratic Republic of Congo.
Meanwhile, zinc production declined 16% year on year to 938,500 tonnes. Gold and silver production also fell. However, full-year cobalt production jumped 40% to 43,800 tonnes, while nickel strengthened 5% to 107,500 tonnes.
Despite this fall in copper and zinc output, Glencore reiterated its production guidance for 2023. And it’s still expected that the company will post over £10bn in net profit next year.
Long term, the demand for its products, particularly copper and cobalt, should remain extremely strong. These raw materials are key to the global transition to clean energy. Plus, they’re essential for the increasing urbanisation of the developing world.
The stock
The stock is extremely cheap. It has a price-to-earnings (P/E) ratio of 5.6. That’s less than half the average P/E for the FTSE 100, which today stands at around 13.5. And its price-to-sales (P/S) ratio is just 0.35, which is well below the mining industry average.
And this is all despite the shares rising 37% over the last 12 months.
The stock also carries a whopping 8% dividend yield for 2023. Even if the dividend is reduced, (which is par for the course with cyclical mining stocks), it’ll almost certainly still tower above the 3.7% FTSE 100 average.
This combination of extreme value, market-thumping income, and long-term industry growth is the reason I bought the stock.
Risks
To a large extent, Glencore is at the mercy of various commodity prices. And nobody really knows for sure which way they’ll go this year or next. However, analysts at Goldman Sachs see raw material prices increasing as much as 43% this year.
And Glencore is further advantaged by its market position as both trader and producer. Its marketing division could still make money trading commodities in volatile markets.
Another uncertainty is the ongoing controversy over Glencore’s coal operations. The company is the world’s largest coal trader and most profitable public miner of thermal coal. However, large institutional shareholders are heaping massive pressure on the company to detail precisely how its thermal coal production aligns with its net-zero targets.
Long term, the company has vowed to “manage down” its coal assets. But last year the company’s coal production rose 6%, largely due to its acquisition of extra Colombian mining capacity in January 2022.
This is a thorny issue. There’s the risk institutional shareholders could start dumping the stock on environmental, social, and governance (ESG) grounds. That would obviously not be great news for the share price.
However, it’s a risk I’m willing to take. I think the supply-demand imbalances in the commodity markets could remain for years. This would bode well for Glencore’s profits and increase the prospect of further generous payouts.
