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The Glencore share price has fallen 20% in six months – here’s what I’d do now

Shares in mining giant Glencore (LSE:GLEN) have taken a beating over the last six months or so, with the company’s share price currently sitting at 235p, a fall of just under 20%.

A recent surge has prompted some investors to consider whether now is the right time to buy into a recovery of the FTSE 100 stock.

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Glencore has suffered from falling profits in recent times, no less than in its most quarterly earnings report where its adjusted earnings before interest, tax, depreciation and amortisation fell 32% to $5.6bn.

Full-year results in 2018 fell short of expectations and that trend appears to be continuing this year, with lower commodity prices for its main production materials weighing on performance.

So what are the prospects for the Glencore share price for the remainder of 2019 and beyond?

Operational issues

Fears over a global recession and an ongoing trade conflict between the US and China, leading to a fall in cobalt prices led to declining profits for Glencore in the last quarter, but the company also referred to unresolved operational issues as making up $2bn of the $8bn decline in operating earnings.

While cobalt prices have recovered somewhat since Glencore announced it was closing its Mutanda mine in DR Congo, it’s the so-called operational issues which lead me to be sceptical about the prospect of a recovery.

New laws in the African country made it increasingly difficult for one of Glencore’s biggest mines to be profitable. DRC is the world’s largest producer of cobalt but the introduction of a raft of smaller competitors has driven prices and profitability down.

Value play

Looking at Glencore’s dividend yield of 6.5% alongside a current P/E ratio of more than 9, there is certainly an argument to say that the stock represents a great value investment now at 235p.

Considering other miners such as Rio Tinto and Anglo American offer yields of 5.5% and 4.2% respectively at current prices, as an income investment that argument is potentially stronger.

However, Glencore is currently the subject of a number of ongoing investigations into alleged corruption in the countries where it has mines, which is harming its reputation and making it more and more difficult to do business there.

The firm’s half-year results also included a write-down of around $350m due to the falling value of unsold inventory, which doesn’t fill me with confidence that it is prepared for potentially wide swings in commodity prices.

While the very nature of the mining industry in which Glencore operates is quite cyclical, much of the pressure affecting the prices of cobalt and other commodities relates to ongoing geopolitical uncertainty.

With US President Donald Trump continuing to slap extra trade tariffs on China and a variety of other issues weighing on the wider global economy, I don’t see that uncertainty coming to an end any time soon. 

That’s why I’d hold off on buying Glencore shares at this stage, at least until the prospect of steady long-term rises in commodity prices become a reality.

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conorcoyle 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.