To me, investing in value stocks doesn’t mean just searching for companies that trade at rock-bottom price-to-earnings (P/E) multiples. Of equal importance are the long-term prospects for the business, both in terms of growth and cash generation.
Both Glencore (LSE: GLEN) and Centamin (LSE: CEY),have had a disappointing 2023. The share prices of these two commodities businesses are down 17% and 20%, respectively. But with tremendous growth potential, I recently added both to my portfolio.
Cash generation machine
On the face of it, first half-results at Glencore looked disappointing. Both adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) and operating cash flow dropped 50% compared to 2022.
2022 was an exceptional year. High commodity prices and huge volatility presented it with significant arbitrage opportunities. If one removes this year, 2023 is the best first half it has had in the last decade.
It generated nearly $8.5bn in operating cash flow in H1. This allowed for ‘top-up’ returns of $2.2bn to shareholders, in the form of dividends and buybacks. Total returns for 2023 are expected to be $9.3bn.
Today’s and tomorrow’s energy needs
Glencore mines and markets many of the critical metals needed to make the energy transition a reality. This includes copper, nickel, cobalt, zinc and alumina. It also has a growing recycling business, promoting circularity.
Ore grades of these critical metals continue to decline. As decarbonisation accelerates, shortages are, I believe, inevitable. What reserves it does have, it intends to hold back until prices begin to reflect this reality.
The business continues to be heavily reliant on coal. This produces both opportunity and risk.
As it begins to wind down its coal operations in the future, this will lead to a gaping hole in revenues, which its metals business will need to fill. But on a medium-term basis, the world continues to need energy in order to drive economic prosperity.
A new gold cycle
Gold prices have been hovering around the $2,000 an ounce mark for some time now. Despite this, the Centamin share price continues to struggle.
The reason why gold prices have been holding up so well is because central banks across the world have been buying gold hand over fist. This is unsurprising given the level of public debt across major Western economies.
As the largest gold producer in Egypt, I think the Centamin share price could explode as the next gold cycle begins to take off.
Looking at its production estimates at its Sukari mine reinforces my conviction for its prospects. Over the next 10 years, annual production is expected to average 506koz. All-in sustaining costs (AISC) over that time frame will average $922. AISC today is over £1,200.
Precious metals shares can be very volatile. This has been particularly evident with Centamin over the past few years. In 2020, its price doubled in just a few short months, before losing all those gains over a similar time frame. That remains a risk.
However, this time I believe share price gains will be more long-lasting. Gold’s unique position as a safe-haven asset, could see investor interest in the yellow metal grow exponentially into the future.