Glencore (LSE: GEN) shares have been under pressure this year, falling to the lowest price levels since 2016. Back in March, Glencore’s share price fell to 112p, a drop of 53% from the 1st of January. This wasn’t a big surprise given the fact that the Covid-19 has had a significant impact on the mining industry. But the recovery was impressive as the shares are up by 50% since the bottom in March, and a quick look at the fundamentals convince me that they are actually worth buying right now.
Glencore shares drop
Glencore is a pretty big commodity trading and mining company specialising in mining, producing, and trading raw materials such as gold, silver, nickel, copper, aluminium, zinc, etc. It is also one of the largest marketers of oil and coal products. The Anglo-Swiss multinational company has a market cap of £22bn, and is one of the most profitable mining companies worldwide with an estimated revenue of £138.99bn in 2020.
So, what happened? The fundamental reason for the 50% drop in Glencore shares was obviously the Covid-19 pandemic. This has led to a pause in some mining operations, and high storage costs for energy products. Besides that, Glencore has struggled for the past three years from a decrease in profits, weaker commodity prices, and the ongoing trade conflict. Further, Glencore is facing several investigations, which have also pushed away investors.
Eventually, Glencore shares fell by around 30% over the year to date, and the company scrapped its 2020 annual dividend after a surge in the company’s net debt.
What’s next?
Glencore shares are in limbo, but for me it’s hard to see them fall again, in particular as commodity prices soared during the year. Higher commodity prices typically help Glencore to get higher revenues and vice versa.
Given the fact that some of Glencore’s mining operations were mostly unaffected by the Covid-19 shutdown of economic activity, and some of the company’s operations have returned to full capacity, Glencore shares could be trading at a distinctly discounted value.
The big concern for investors remains how much debt Glencore has. Its net debt spiked 12% in the first half-year to $19.7bn, meaning Glencore’s debt ratio currently stands at 53%. Not too bad but not great for investors. Generally, Glencore’s financials are at a cyclical low point but at the same time, it has enough capital and economic power to survive this crisis. Even though it has posted a $2.6bn loss for the first half of the year, its trading and marketing division performed well and, as such, Glencore has posted a net profit on an operating basis.
Potential growth
Considering all the above, I’d buy Glencore shares for a medium-long term. Yes, there will be a negative impact on Glencore shares if the Covid-19 situation escalates again. As a large part of Glencore’s revenue derives from trading commodities, 2020 was not a profitable year for Glencore. However, this might change soon. After all, Glencore’s net income has been quite stable from 2009-2019, and its operation is extremely diversified. In my opinion, there’s a big chance Glencore will return to growth over the next few years.
