July wasn’t a great month for Glencore (LSE: GLEN) shareholders like myself. The share price dropped almost 20% between 5 July and 5 August — one of the sharpest declines since mid-2022. A mild recovery saw it regain 4% but that may have been scuppered by last week’s disappointing H1 2024 results.
The miner suffered a per-share loss of 1.9c (down from 3.6c profit in H1 2023) and a net loss of $233m (down from a $4.57bn profit in H1 2023). This is despite revenue increasing 9% to $117bn, beating analyst expectations by 13%.
The share price gained 4% in the days following the results announcement but has slipped slightly since.
Bribery allegations
The 20% drop last month wasn’t all that surprising. The FTSE 100 mining giant has been suffering bad press lately in the wake of a Swiss bribery probe that amounted to a £152m fine. The investigation pertains to an alleged incident in 2011 involving a Congolese public official and a business partner of the miner.
According to Glencore, authorities couldn’t identify whether it knew about the incident or benefited from it. However, it agreed to pay the penalty in order to close the case. In 2022, the miner paid $1bn in penalties after pleading guilty to bribery and market manipulation. Several former executives of the company have also been charged with bribery-related offences.
Environmental gamble
In another potential blow to its image, the company recently abandoned plans to offload its coal division after pushback from shareholders. When competitor Anglo American demerged its coal mining business in 2021, Glencore came under pressure to follow suit. However, it seems a recent change in sentiment regarding fossil fuels resulted in the u-turn.
Environmental, social, and governance (ESG) ratings have been a big driver for investors for the past five years. However, in recent months, many have begun to question the model’s efficacy. Limited transparency and a lack of regulatory oversight have tarnished the rating system’s legitimacy. And with many renewable energy solutions slow to turn a profit, investors are losing patience.
However, coal will forever be a black mark on the climate change wall of shame and this reversal could leave a bad smell for Glencore. Satisfying shareholders today may be beneficial in the short term but could prove a risky gamble for the future.
The bottom line
From a valuation viewpoint, I believe Glencore stock is still an attractive investment. Its share price is undervalued by 16.3% based on future cash flow estimates and although it’s now unprofitable, it has a good price-to-sales (P/S) ratio of 0.3. This figure derives from sales worth $227.5bn — three times more than the company’s market cap of $63.7bn.
The slip into unprofitability is also not uncommon for Glencore. The company suffered similar bouts of negative earnings in 2016 and 2020 – only to achieve new record earnings in subsequent years. With strong cash flows and a relatively stable balance sheet, I doubt a brief drop in earnings will affect its operations.
What exactly the company plans to do about its public image is another question altogether.
I hope it has a plan.
