Glencore (LSE: GLEN) shares have fallen 28% from their 18 January high for two key reasons, it seems to me.
The first and largest part of the drop was down to fears over China’s economic growth prospects this year. As the world’s key commodities buyer, any sustained hit to its growth would impact prices.
The second more recent part of the fall was due to disappointing H1 results. Partly this was due to slower China growth in Q1. And partly it was due to rising costs of coal and cobalt extraction compared to sales prices.
The risks to buying the shares now are that China’s economic recovery may stutter. Another major global financial crisis would also hit commodities prices.
In my view, China’s economic growth outlook is much better than many analysts think. And as this picks up, it will narrow the cost and sales price gap across the commodities market.
From a fundamental perspective, then, I believe these factors make the current 28% discount on Glencore shares look overdone.
From a technical perspective, this view is reinforced, I think. Glencore reported a P/E ratio of just 4.29 times at the end of 2022. And it remains around that level now. This compares to a current average trailing P/E ratio of just under 11 for FTSE 100 firms.
China has no growth crisis
On 17 July, China’s Q2 GDP showed economic growth increased by 0.8% in the quarter, compared to Q1. This was better than consensus analysts’ expectations of a 0.5% increase.
On a year-on-year basis, the economy expanded 6.3% in Q2 — significantly better than the 4.5% rise in Q1.
And there remains enormous political determination in the country to record growth this year of over the official 5% target.
This should support Glencore’s key oil and gas business, given China is the world’s biggest net importer of them.
It should also support its huge copper business, used in Chinese-made computers, smartphones, and other electronic devices. It is also used for wiring in the country’s massive construction programmes.
Strong elements in the H1 results
As a result of these factors, group adjusted EBITDA fell by around half from the same period last year. But the figure still came in at $9.4bn. Additionally, cash generated by operating activities was $8.4bn.
The results were sufficient to allow Glencore to announce top-up shareholder payments of around $2.2bn.
This additional return will comprise a $1bn ($0.08 per share) special cash distribution and a new $1.2bn buyback programme.
Currently, based on the share price of £4.19, the shares have a dividend yield of 8.73%.
This means that if I invested £10,000 now, then I would make £873 this year in passive income from the stock. If the yield remained the same over 10 years, I would make £8,730 to add to my £10,000 investment.
This return would not include further gains from any reinvestment of dividends or share price appreciation. It would also not account for any tax liabilities or share price falls.
If I did not already have holdings in the commodities sector, I would buy Glencore shares now. I think it will maintain its high dividend payouts that could turbo-charge my passive income. And I believe it will recoup the 28%+ share price losses seen since January over time.