The Glencore (LSE: GLEN) share price started 2023 with a bang. It hit an intra-day record high of 584p in January. However, since reaching those dizzy heights, it has fallen back considerably. As a cyclical business, fears of a slowing global economy have seen commodity prices, particularly copper, decline. So why do I remain so bullish on its prospects?
Market dislocation
2022 was a record year for Glencore. The company benefited from extraordinary physical and financial market conditions. Extreme dislocations across energy markets saw the price of coal, oil and natural gas soar.
Its decision to not only maintain but expand its coal operations turned out to be a key strategic move.
Its largest division, energy products, saw a 400% increase in earnings before income tax. Coal EBITDA margins alone rose by an astonishing 2,200 basis points.
On the back of these bumper results, it all but wiped out its net debt. This has left room for bonus shareholder distributions. Dividends and buybacks amounting to 56 cents per share, equate to a total yield of 9.8%.
Energy transition
A key reason why I like Glencore shares relate to its pivotal role in the energy transition. During the next decade it will begin winding down its coal operations. The copper business is the engine of future growth.
If the world is going to meet its ambitious decarbonisation targets, copper production is going to need to increase significantly. Glencore, however, is in no rush to bring new supply on-line.
To cope with the proliferation of renewable energy, battery storage, grid expansion, heat pumps and EVs, an estimated additional 100m tonnes of copper will be needed. Total world production will only be able to cater for about half of this demand.
Compounding the problem is a dearth of new copper projects. Capital forecasts for all the major miners tell a similar story. Exploration is being left to the junior miners. Finding new high-grade ore discoveries is becoming more challenging. The upshot is that the world faces a supply cliff.
Risks
Mining stocks often trade on lowly price-to-earnings ratios due to their cyclical nature. Therefore, I tend to place less weight on this metric in assessing risk. In this environment, of greater concern to me are rising input costs.
Compared to just 12 months ago, the business has increased its capex estimates for 2023 by 28%. Inflation is the key driver. Labour costs have risen by 10%, diesel by 50% and explosives by 50%.
Another key risk relates to project delays. This can be attributable to a whole host of variables, such as weather and logistics constraints, or community protests on environmental concerns.
However, despite these risks, the company is likely to experience a number of tailwinds both in the short and long term.
As the manufacturing plant of the global economy, the reopening of China is likely to see a surge in demand for many of the commodities Glencore mines.
A continued global focus on energy security and decarbonisation together with government policies, such as the US Inflation Reduction Act, demonstrate the growing need for critical raw materials well into the future. That’s why on the recent share price pullback I snapped up more shares for my portfolio.
