Commodity stocks are famously cyclical and volatile, and Glencore (LSE: GLEN) shares have lived up to that description. The long-term performance tends to be a cycle of peaks and troughs, although the regular stream of dividends smooths out some of the ride.
While timing shares is almost impossible, I prefer to buy mining stocks when they’re falling rather than rising. There was a brilliant opportunity in the pandemic – for those who were brave enough – when the Glencore share price crashed.
Highs and lows
Three years ago today, I could have bought its stock at around $195 a share. Today, I’d have to pay around $461. If I had invested £3,000 back then, my money would have increased by a thumping 136%. It would be worth £7,080 with dividends lifting the total to around £7,500. Or to put it another way, I’d be a happy investor.
Unfortunately, I didn’t buy Glencore three years ago. However, I did invest £2k on 26 July and another £1k on 1 September. So far I’m down 0.15% but the stock is up 6% in the last week as interest rates appear to have peaked, boosting market sentiment.
I measure my investment performance in years – and ideally decades – rather than weeks, so short-term stock movements are neither here nor there. Yet in that short span, Glencore has shown plenty of volatility, rising or falling on every piece of economic data from China, the world’s biggest consumer of metals and minerals.
Anybody buying Glencore today – or any other FTSE 100 mining stock for that matter – must accept that China’s glory growth days may be over. The country has invested too much money into building its infrastructure, and has a huge debt hangover as a result.
Throw in high youth unemployment and an increasing and potentially innovation-throttling authoritarianism, and its race to riches could be set to slow dramatically. The natural resources sector has to adjust to this new reality. With the world on the brink of recession after two years of monetary tightening, I expect more bumpiness.
Reasons to be cheerful
At the same time, Glencore should benefit from the renewables revolution, which will boost demand for critical minerals.
It isn’t abandoning fossil fuels yet, having just bought Teck’s coking coal business, which may deliver up to $6bn of free cash flow a year. Management argues that coal is needed to support the energy transition but the move also carries political risk in the age of net zero. Glencore is already one of the biggest producers of thermal coal.
The Glencore share price has fallen 11.53% over 12 months. That could make today a handy entry point, but it may also have further to slide. That explains my small initial purchases.
I intend to keep nibbling away at this one. Glencore shares are hard to resist, trading at a super-cheap 4.1 times earnings. Dividend payouts look a little bumpy, with a forecast yield of 8.04% in 2023 expected to fall to 6.17% in 2024.
Another concern is that Glencore carries $29bn of net debt. However, with annual sales of around $220bn, I’m not too alarmed about that. I’ll continue to buy more shares when I have the cash and opportunities arise. I just wish I’d started three years earlier.