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Is the Glencore share price a bargain after Vedanta surges 25% on bid approach?

Diversified mining company Vedanta (LSE: VED) has risen by over 25% today after the company confirmed a bid approach which values it at 825p per share. The company has reached an agreement, in principle, on the key terms of a possible recommended all cash offer by Volcan for the remaining shares which it doesn’t currently own.

Of course, the mining sector has experienced an improved performance in the last couple of years. With the prospects for an upbeat world economy, does this mean that other mining companies such as Glencore (LSE: GLEN) could represent bargain investment opportunities at the present time?

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Low valuation

The potential buyer of Vedanta is a holding company which is wholly owned by the Anil Agarwal discretionary trust. It already owns 66.53% of the company and it appears as though it’s taking advantage of what appears to be a relatively low valuation for the stock.

As mentioned, the offer values the company at 825p per share. While this is a 27.6% premium to the closing price of 647p per share on 29 June and a 13.5% premium to the three-month volume weighted average price of 727p per share, it still represents a relatively wide margin of safety for the buyer. Vedanta currently trades on a price-to-earnings (P/E) ratio of around 7.8 using 2018’s forecast earnings figure. That’s even after today’s share price rise has been factored in.

Uncertain future?

Of course, the mining sector has experienced a volatile number of years. Commodity prices have picked up in the last couple of years, but were weak for a prolonged period. Therefore, it could be argued that valuations across the sector should reflect this.

However, the valuation of Vedanta and other mining shares such as Glencore suggests that there could be value investing opportunities on offer. For example, Glencore trades on a P/E ratio of 11, which indicates that it could generate high returns in the long run.

Catalyst

One potential catalyst for the stock is the outlook for the global economy. The US and China are performing relatively well at the present time and this trend is expected to continue over the medium term. Both economies appear to be strong, and while a trade war remains a possible threat, ultimately it seems to be highly unlikely due to the potential damage it could cause to both economies.

Therefore, the mining sector could enjoy a prosperous period. Glencore seems to now be in a stronger position from an operational and financial perspective. It has restructured its business in the last few years and this has created a company better able to survive the ups and downs of the commodity cycle. As a result, and with the potential for further M&A activity across the sector, the stock could be worth a closer look for long-term investors.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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