This time last year, the market had left Glencore (LSE: GLEN) for dead. Almost every day some set of City analysts or news outlet warned of the company’s impending bankruptcy and management was frantically trying to reassure investors. Between mid-May 2015 and the beginning of January 2016, shares in Glencore lost 75% of their value, and many investors were braced for further losses.
A year later and the picture couldn’t be more different. Since the beginning of 2016 shares in Glencore are up by 200% and are only 30 points off the 2015 mid-May level of 300p. The company has made terrific progress cutting net debt down to approximately $15bn from last year’s more-than-$30bn, and the group looks to be on a more stable footing for growth.
And based on current commodity price trends, it looks as if Glencore’s shares could have further to run after recent gains.
Glencore’s recovery has partially been a result of the company’s actions and partly an effect of rising commodity prices.
At the end of last year, in an attempt to shore up falling base metals prices, Glencore shut some of its largest zinc mines, taking 500,000 tonnes of production out of global markets – equivalent to around 3.5% of production. These actions sent the price of the steelmaking ingredient charging higher. From a low of $0.70 per pound printed last year, zinc is currently trading at $1.15 per pound. Zinc makes up 19% of Glencore’s revenue.
Zinc’s price recovery is really a side story to the price recovery of coal and copper. Thanks to China’s decision to shutter excess capacity in its mining industry, part of the country’s wide-sweeping reforms, coal and copper prices have blasted past all expectations this year.
Copper has just seen its biggest weekly rally in 35 years, rising 20% in just a few days as speculation that Trump will unleash a wave of infrastructure spending, coupled with China’s supply/demand actions has sent traders scrambling to buy. Meanwhile, the price of premium hard Australian coking coal is up 250% since April this year at more than $300 per tonne as supply wilts and demand surges. Glencore generates around 40% of its revenues from copper and 20% from coal.
Glencore’s larger peer, Rio Tinto (LSE: RIO) is also set to take advantage of the recent commodity price surge. Around 7% of Rio’s sales are derived from coal, and 13% come from copper although, for Rio, the bigger prize is iron ore. As much as 46% of the company’s sales are from iron ore, and prices have more than doubled this year to $80 per tonne.
It’s no surprise that off the back of this price growth City analysts have raised their earnings targets for 2016 and 2017 by 33% and 44% respectively since July. Shares in Rio are currently trading at a forward P/E of 16.9, falling to 15.6 next year.
Analysts are just as excited about Glencore’s growth. The City expects the company to report earnings per share of 7.6p for this year and 13.1p for 2017. If commodity prices remain where they are today, I wouldn’t rule out further growth and a reinstatement of the company’s dividend.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.