In the space of just a few short years, Glencore (LSE: GLEN) shares have gone from being one of the FTSE 100 best performers, to its worst. Year to date, the share price is down a fifth, and in the last year its shed over a third of its value. As a long-term investor, my patience is being sorely tested, that’s for sure.
Coal assets
The primary driver for the stock’s weakness is depressed thermal (energy) coal prices. In 2024, adjusted earnings before income tax, depreciation and amortisation (EBITDA) for its coal assets declined $3.1bn, to $5.3bn.
Despite this fact, last year, 90% of its institutional shareholders voted to keep its coal assets. I still believe that to be the right move.
In the six months following its acquisition, steel-making coal from EVR contributed $1bn toward EBITDA. I expect this contribution to grow in the coming years as the business realises synergies across the coal value chain, including procurement and marketing.
Energy coal sits in a completely different basket, of course. All the long-term forecasts predict a significant decline in demand. This remains a clear risk to the business. Should demand fall quicker than it foresees, then future revenues could be impacted.
The business has made a bet that demand will remain robust for the next decade, or so. What has become abundantly clear to me is that decarbonising the energy value chain isn’t going to happen overnight. Cheap, baseload electric power remains an overwhelming consideration for growing, developing countries. And that’s where demand for coal will predominantly continue to come from.
Electrification
Billionaire investor Warren Buffett once said: “Someone is sitting in the shade today because someone planted a tree a long time ago.” And this is how I very much view Glencore stock – as a long-term play.
Today, the vast majority of its revenues come from coal. But the business very much sees its future in copper.
I still contend that most investors don’t really understand the challenges faced as we seek to electrify our world. The consensus view is that the miners will just step up and start producing more copper to meet soaring demand. I don’t hold that view.
Firstly, all the major copper miners across the globe continue to suffer from ore grade declines. The fact of the matter is that it’s getting harder to find high-quality assets.
On top of that, large-cap miners are becoming increasingly risk averse. Exploration makes them nervous. And for good reason. Investors have long viewed the industry as destroyers of shareholder wealth.
Cart before the horse
My view’s very simple. Nvidia and the hyperscalers are promising a world where artificial intelligence (AI) increasingly becomes an integral part of our life. Elon Musk foresees a world of robots. But these technologies cannot be built at scale unless investors start appreciating the vital importance of metals. Money doesn’t grow on trees, and neither does copper, or any other base metal.
Its share price may be depressed but management continues to buy back its own stock at record pace. It recently just completed $1bn, and more is expected when it reports half-year results in August. I still contend a re-rate’s coming, which is why I bought some more shares in the past month.
