Commodity stocks are notoriously cyclical. Indeed, FTSE 100-listed miner and metals trader Glencore (LSE:GLEN) has been no stranger to volatility in recent years. The Glencore share price delivered a handsome 46% gain over five years, but its -22% performance over 12 months isn’t so pretty.
As the stock trades near a 52-week low, is this a great time to consider buying? Or could an investment in the company destroy rather than create wealth for shareholders?
Here’s my take.
Share price fall
Glencore’s metals business centres on a core range of commodities, including copper, cobalt, zinc, nickel, and ferroalloys. Moreover, it’s a global leader in producing and exporting thermal and coking coal. Glencore also markets oil and natural gas.
The prices of many of these raw materials have retreated significantly in recent months. A sluggish global construction sector and weak demand from China are key factors behind the declines.
Consequently, Glencore shares have suffered. The group’s latest production report revealed falling volumes across the lion’s share of its commodity portfolio.
In its half-year results, EBITDA plummeted 50% to $9.4bn. To compound difficulties, Glencore’s currently dealing with class action litigation brought by multiple shareholders. The claimants allege the company failed to disclose past corruption and bribery schemes in its statements to the market.
Recovery prospects
Despite the numerous challenges facing the firm, there are some reasons for cautious optimism. For starters, the stock has a price-to-earnings (P/E) ratio of just 6.7. That looks cheap, suggesting the risks might be priced in already.
In addition, Glencore’s recent results should be viewed in the context of 2022’s record performance. Sky-high coal prices proved incredibly lucrative for the company. Indeed, the fossil fuel continues to be a source of strength, with production volumes rising 3% on last year.
Accordingly, ESG-conscious investors may want to think twice before investing in Glencore shares. That said, the company plans to gradually transform its business model. It intends to spin off the coal division following a finalised merger with Teck Resources‘ steelmaking coal business.
Increasingly, the portfolio will be oriented towards a swathe of ‘green’ metals that are essential for the clean energy transition. If the group can successfully manage this evolution, the Glencore share price could experience strong growth in the coming years.
A chance to get rich?
There’s plenty to like about Glencore’s fundamental strategy and the breadth of its commodity portfolio. The marketing business means it isn’t an ordinary mining stock either since this division can benefit substantially from elevated commodity market volatility.
However, this is a potentially high-risk stock. A weak global economy could continue to suppress demand for raw materials. I’m also worried there could be further twists and turns in the company’s ongoing legal battles.
Although there might possibly be significant upside potential for Glencore shares, I wouldn’t want my portfolio to be overly exposed to the business. But if I had spare cash, I’d invest — not least for a whopping 9.6% dividend yield.
Nonetheless, the risks are too great for me to take a big enough stake to potentially secure life-transforming riches. Instead, I’d invest with a view to adding a nice boost to my returns, rather than making Glencore shares a core portfolio holding.
