The share price of Glencore Xstrata (LSE: GLEN) is rocketing. Up 47.5% over the last month, compared to the FTSE 100‘s 13.8%, there is little doubt about current demand for the stock of the Anglo-Swiss multinational. Indeed, the share price is now back to pre-pandemic levels.
However, short-term stock price swings are very hard to interpret. Factors outside a firm’s control can make a large difference to a share price. This is in sharp contrast to the long-term trend when price movements generally reflect the performance of the underlying business.
So, how does this apply to Glencore?
Glencore share price drivers
Over the last 10 years, Glencore’s share price has been underwhelming, returning a negative 54.6% in comparison with the Footsie 100’s positive 170%. Generally, it’s a firm that appears to continually weigh down the index. This is despite producing a higher-than-industry average return on equity (ROE) of 10.6% over the last five years. It appears to manage its shareholders’ funds better than the average miner. But, it’s not enough to drive increased demand for its stock over time.
Things were different back in August 2020 when the mining behemoth posted a fall in its half-year profits, blamed on the Covid-19 pandemic. It also reported a 12% increase in net debt and a conditional return to paying a dividend in 2021. Investors took this news in context and reacted positively. As a result, the firm experienced a short-term spike in demand for its stock.
However, no further financial results are due until next spring, so I think it’s a valid assumption that the recent share price take-off is due to external factors alone. This potentially leaves the future Glencore share price vulnerable to outside events.
Although this situation is true of all companies, it is an externality magnified in a mining firm’s revenues as they are dependent on commodity prices. Coincidently, copper prices are at a seven-year high. As a key commodity for Glencore, this should reflect well in the firm’s share price. In addition, China, one of Glencore’s biggest markets, is now back to business after the Covid-19 shut-down. It has a renewed appetite for raw materials, stimulating demand for Glencore products once again.
Is Glencore a good buy?
The current Glencore Xstrata share price is hovering around 241p. Given the net asset value per share is around 222p, that’s a lot of business for your money. By comparison, Rio Tinto shares are currently selling for twice the net asset value. This makes Rio relatively more expensive by this metric.
The future also bodes well for Glencore as it’s positioned itself well for the energy transition from fossil fuels to renewables. Its key products of copper, nickel, and cobalt are used in batteries and infrastructure. In addition, competitors such as Rio Tinto are to divest out of coal but Glencore is holding steady and preparing to mop up any additional demand created. That said, the firm has also agreed to net-zero carbon emissions by 2050 by reducing its coal production.
Although the recent share price rise is likely due to external events, Glencore is well-positioned for the future. And despite the price rise, I think the stock is still relatively cheap.
