Glencore’s (LSE: GLEN) share price has dropped 25% from its 20 May 12-month traded high of £5.05.
Like many firms in the commodities sector, it has been hit by low prices in several of its key products. This was largely driven by China’s uncertain economic recovery in 2023, following a dramatic slowdown during its Covid years.
Before this, the country had been the biggest global buyer of many of the commodities that Glencore supplies. These include copper, aluminium and steel, and oil and gas, among many others.
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Ultimately, China surpassed its official 5% economic growth target last year and the same target is in place this year. However, the main risk for Glencore is that this recovery stalls again, keeping commodities prices on the low side.
That said, the giant commodities firm looks to me like it is positioning itself for renewed growth this year and next. This should drive earnings higher, which would power increases in its share price and dividends, I think.
Positioning for growth
Two bright points for growth prospects emerged from my reading of Glencore’s otherwise uninspiring H1 2024 results released on 7 August.
First was the retention (rather than demerger) of its coal and carbon steel materials operations. The firm believes that these will enhance its ability to fund opportunities in its transition metals business, including its copper product pipeline.
Second was the ratification by shareholders of the company’s purchase of Elk Valley Resources. This builds on its plans for carbon steel, particularly with an eye on China’s renewable energy infrastructure plans.
Indeed, consensus analysts’ estimates are that Glencore’s earnings will increase 39.9% a year to end-2026. Earnings per share are expected to grow 43% a year to that point. And return on equity is forecast to be 14.6% by then.
Debt reduction to boost dividend?
Another element that caught my eye in the results was the 27% reduction in net debt over H1. Specifically, it fell from $4.9bn at the end of 2023 to $3.6bn.
According to the firm, a further $0.3bn reduction would allow its debt cap to be reset and enable bigger returns to be made to shareholders. This top-up could happen in February, Glencore said.
In 2022, it paid a special dividend of 8 cents (6p) a share, bringing the total up to 52 cents. That gave a yield of 9.3% at the time, against the current 2.5% return. Special dividends were also paid in 2021 and 2020.
Are the shares undervalued?
The shares also currently look to be very cheap to me. On the key price-to-book (P/B) measurement of stock value, they trade at 1.4.
This compares to the average 2.3 P/B of its peers. These comprise Anglo American at 1.5, Rio Tinto at 1.8, Antofagasta at 2.7, and BHP at 3.1.
It is also bottom of the group on the price-to-sales (P/S) valuation – at just 0.3 against a 2.3 peer average.
Will I buy the shares?
I have other holdings in the sector, so buying another would unbalance my portfolio.
If I did not have these, Glencore would be too cheap for me to ignore and I would buy it. It has strong growth prospects and is likely to increase its shareholder rewards, in my view.
