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The Glencore share price looks cheap, but here’s why I wouldn’t buy it

It’s not that long ago that mining and commodities giant Glencore (LSE: GLEN) was close to collapsing under a mountain of debt, having crushed the hopes of investors who bought in at the IPO in 2011.

Collapse

Between that fateful day and January 2016, shareholders were left with a loss of 85% of the money they stumped up, as the firm’s management got it disastrously wrong.

Since those depths, the share price has quadrupled in a recovery whose speed many did not expect, though even today the share price is still 40% below its IPO level.

How’s Glencore’s business going today?

Production update

On Friday the company reported an 11% rise in copper production for 2018, “mainly reflecting the restart of Katanga’s processing operations in late 2017, partly offset by the completion of open-pit mining at Alumbrera.”

Own-sourced nickel production came in 13% ahead as its Koniambo operation ran two production lines during the year, and coal production was 7% ahead of 2017’s output.

Production was largely up across the board, with cobalt production up a big 54%. The downside, though, is that a lot of the cobalt is being stockpiled at the Katanga facility as it apparently contains excess levels of uranium which needs to be dealt with.

Own-sourced zinc production was essentially flat.

Valuation

On P/E multiples of only around nine and dividend yields better than 5%, Glencore looks like a buy on the face of it. At the halfway stage the company was sitting on net debt of $9bn, which doesn’t look too stretching when compared to current levels of earnings.

But are Glencore’s low P/E values, well below the long-term FTSE 100 average, genuinely indicative of an undervalued stock? I’m really not so sure.

The cyclical nature of the commodities business and the very volatile nature of the company’s earnings in recent years suggests it does deserve a lower P/E rating than average, as upmarket valuations really are (or at least should be) reserved for those companies with steady earnings over the long term.

Buy?

But that’s during an upswing in world commodities markets, and I wouldn’t like to guess whether Glencore’s balance sheet is sufficiently robust to survive the next cyclical downturn.

And the same CEO, Ivan Glasenberg, who presided over the near collapse is still at the helm. Is it bad that he wasn’t replaced or good that he stayed on to rectify the damage? He certainly suffered himself as a major shareholder, and other managers might have cut and run while they could still pocket a billion or so.

Bottom line for me, I’m not sure. But I prefer to put my money in companies with better management track records.

Not me

I’m torn, but I’m out. I do think the mining and minerals business can be a profitable one, and it’s something I’d seriously consider putting some of my own money into.

But not right now, as I think there are far better FTSE 100 opportunities out there in today’s depressed market without having to take a risk on cyclicals. And even in the mining business, I see competitors with significantly better management records.

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Alan Oscroft 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.