Glencore’s Value Dilemma: Unearthing the Reasons Behind Its Bargain Shares

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Glencore (LON:GLEN) shares are cheap at the moment because mining and commodity stocks are weaker due to their inherent cyclicality. In this analysis, we explore whether Glencore shares going to continue falling or if they can recover.

Glencore is a commodities and mining house and is one of the clutch of stocks from the mining sector, within the UK FTSE 100. Make no bones about it Glencore is a giant, with a market cap of £45 billion.

The current business was formed through a merger with Xstrata back in May 2013.

However, Glencore can trace its roots to the business built up by the colourful US financier and commodities trader, Marc Rich. Who fled to Switzerland in the 1980s to avoid charges of tax evasion in the USA.

Rich was subsequently pardoned by President Bill Clinton, but Glencore is still headquartered in Switzerland to this day.

Why is Glencore so cheap?

Glencore’s stock price has fallen by just under -25.0 % over the last year with much of that loss coming in 2024.

Glencore has fallen much further this year than rivals, such as Anglo-American, Rio Tinto and BHP.

However, all three of these peers have also seen their share prices decline in 2024.

In other words, miners do well at the start of an economic cycle and less so, when that cycle is moving into its middle or latter stages.

Mining stocks have also been hampered by problems in China, where the economy failed to re-launch after the country’s Covid lockdown was abandoned, around 14 months ago.

War in Ukraine and associated sanctions have also created issues for miners and commodity traders.

Plenty of its own problems

However, Glencore has had its own set of problems to overcome. Earnings at the business have fallen, whilst the company’s debt levels have risen above city forecasts, following the proposed acquisition of EVR from Teck Resources, for US $6.90 billion.

Weaker markets in Nickel, Cobalt and Zinc have also dented profitability, thanks to higher interest rates, falling demand and increased supply.

More recently Glencore has been implicated in bribery and corruption scandal in Chad.

These things are all relative of course and, according to the FT, Glencore’s recently published 2023 results, were among the best it’s ever produced, in terms of headline earnings, which came in at US$17.0 billion.

Will Glencore pay a dividend in 2024?

Despite those billions in earnings, Glencore’s management took the view that it could do better, and has taken steps to ensure it can pay down its debt levels. One of the casualties of those moves was the dividend.

Glencore will still pay a dividend, however, it will do so at a much-reduced rate of 13 cents per share, well down from the 40 cents it had previously paid.

The company also declined to spend more money on buying back its stock, as it seeks to clean up its balance sheet, ahead of a potential IPO of its coal assets in 2026.

Chief Executive Gary Nagle was quoted as saying that he “will be led by shareholders” as to whether or not to proceed with the spin-out of the coal business.

What is the fair price for Glencore?

Almost a week after Glencore published its 2023 results the stock price is down by -5.0% to 370p.  Though it’s above the two-year low of 365.31p it hit on February 21st.

The current price of 370p  is well below the consensus price target for the stock of 563.33p.

The stock is currently rated as a moderate buy, though the number of buy recommendations among analysts has been falling.

US broker Jefferies wrote on Glencore in the last week, saying that though its profits had come in below the broker’s forecasts, Jefferies believes that the acquisition of EVR from Tek Resources, can be a game changer for the group going forward.

And, that in the future the company will become highly cash-generative, which should equate to large capital returns to shareholders.

If that all sounds like “jam tomorrow” it’s because it is.

Glencore needs to get its business mix right for the current economic climate and in anticipation of the next upswing in the economic cycle.

The timing of that will likely be driven by events in China, the result of the US Presidential election and the point at which the Federal Reserve and other central banks, cut interest rates.

Currently, Glencore shares are cheap but they are cheap for a reason.

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