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Tempted by the 25% fall in the Glencore share price? Here’s what I’d consider first

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The share price of commodity group Glencore (LSE: GLEN) has fallen by 25% so far this year. But the Swiss firm’s performance has not been as bad as this decline suggests, in my opinion.

In an update on Friday, the company said that production of key commodities, such as copper, coal and nickel, was either flat or higher during the third quarter.

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The only disappointment was that oil production was 14% lower than during the same period last year. This was due to an unscheduled one-month outage at the firm’s Mangara field in Chad.

Full-year production of all commodities will be in line with previous forecasts, except oil, where a 6% fall is expected. The shares have edged lower following this news, but I don’t see this as a serious problem, given the group’s financial performance so far this year.

A $5.2bn shareholder return

During the first half of the year, Glencore’s adjusted operating profit rose by 35% to $5.1bn. The group’s net debt fell by $1.6bn to $9bn, and the company committed $4.2bn to shareholder returns for 2018, through a mix of dividends and share buybacks.

It’s since added a further $1bn to its planned buybacks for the year, meaning that a total of $5.2bn should be returned to shareholders by February 2019. That’s equivalent to a return of about 28p per share, or a yield of 9.4% at the last-seen 300p share price.

Too cheap to ignore?

I am sure that Glencore’s founder and chief executive, Ivan Glasenberg, is confident that the value of his 8.5% holding (about £3.7bn) will be enhanced by this programme of buybacks.

I share this view. The shares look decent value to me on 8 times 2018 forecast earnings, with a 5.3% dividend yield. I’d be happy to buy at this level.

A cheaper alternative?

One commodity stock I’ve added to my own portfolio in recent months is Anglo Pacific Group (LSE: APF). Unlike Glencore, this £240m firm doesn’t develop or operate mines itself.

Instead, Anglo Pacific buys stakes in mining assets from which it receives long-term royalties. It’s a nice idea — pay up front and then sit back and let the cash roll in.

Of course, this business model is equally exposed to commodity price movements. The difference is that the firm’s passive role means it can simply stop spending money if cash is tight, and wait for a recovery.

The idea is that the firm builds up a cash buffer during good years, so that it can maintain its dividend during lean periods.

Although chief executive Julian Treger did end up cutting the dividend during the exceptional slumps seen in 2015 and 2016, the stock still offers a generous forecast yield of 5.5%.

Better still, this payout is covered 2.6 times by forecast earnings. It now looks pretty safe to me, even if profits dip.

What could go wrong?

The downside of Anglo Pacific’s business model is that it has no real control over the assets it owns. This means that if the company operating the mine changes its plans, Anglo’s revenue can be affected.

Despite this risk, I see this as a well-run niche business with the potential to provide a reliable income. Trading at 1.1 times book value, with a forecast dividend yield of 5.5%, I’d be happy to buy more.

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Roland Head owns shares of Anglo Pacific. The Motley Fool UK owns shares of Anglo Pacific. 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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