Investing in FTSE 100-listing mining giant Glencore (LSE: GLEN) certainly isn’t boring. Its shares crashed from 300p to just 90p in 2015, only to end 2016 back at 290p. Quite a ride.
Corruption threat
The Glencore share price is down 26% over the past 12 months, and fears of a global slowdown aren’t the only culprit. It is now being probed for “corrupt practices” by the US Commodity Futures Trading Commission (CFTC), amid reports of money-laundering and other compliance issues in the Democratic Republic of Congo, Venezuela and Nigeria. It has been ordered to hand over documents to the Department of Justice.
The group was also caught up in President Trump’s sanctions on Russian companies, because of its 8.75% stake in Russian aluminium producer Rusal, although these have since eased.
Billionaire CEO Ivan Glasenberg plans to retire in the next three to five years. His final stint at the world’s biggest mining company isn’t going to be dull.
At the coal face
In 2018, Glencore’s adjusted EBITDA earnings rose 8% to $15.8bn while net income rose 5% to $5.8bn. It was boosted by a sharp rise in commodity prices, still the main factor driving mining sector sentiment and stock movements.
Earnings have cooled on falling prices for thermal coal, which makes up around 25% of the group’s earnings. Coal is likely to face growing environmental challenges, for example, Norway’s massive sovereign wealth fund may sell its $1bn stake to meet its Parliament’s tighter ethical investing rules. However, that is only around 2.03% of Glencore’s stock, and the shift to electric power could boosts earnings at its copper and cobalt mines in Africa.
Glencore has suffered one or two broker downgrades in recent months, amid concerns that its start-of-year rally left the share price vulnerable. Trading at 10.9 times forward earnings, it hardly looks overvalued, though.
War talk
Net debt is a worry though, up 44% last year to a higher-than-expected $14.7bn, even if it’s still within its desired range of between $10bn to $16bn.
The £40bn Swiss-based, London-listed company has enjoyed healthy cash flows, which funded $5.2bn of shareholder returns and buybacks in 2018. In February it announced a base distribution of $0.2 per share worth $2.8bn in total, plus a new $2bn buyback programme. The board may also top this up, depending on market conditions, and the progress of this year’s targeted $1bn of non-core asset disposals.
Macro concerns
The current yield is 5.64%, comfortably above the 4.5% average yield for the FTSE 100. This makes Glencore a top dividend stock, and a tempting long-term hold, but should you buy it now? Concerns over the global economy are growing (aren’t they always) while China’s growth is slowing, with Trump’s trade war aggravating the problem.
We could see a turnaround on both these issues shortly, though. The Fed is expected to cut interest rates two or three times this year, which may light up stock markets, while Trump is tweeting optimistic signals on talks with China. Both could boost Glencore.
Commodity stocks are cyclical and with the stock down a quarter in the last year, now may be a buying opportunity. Those corruption charges could weigh on the share price for some time, though.
