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Glencore - acquires stake in EVR, demerger planned

Glencore has acquired a 77% stake in Teck's steelmaking coal business, Elk Valley Resources (EVR)...

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Glencore has acquired a 77% stake in Teck's steelmaking coal business, Elk Valley Resources (EVR), for US $6.93bn in cash.

EVR's production of steelmaking coal in the year-to-date to 30 September 2023 has been 17.3 million tonnes, which has helped the business deliver pre-tax profits of CAD $3.1bn.

Glencore noted that it continues to believe that the enlarged coal and carbon steel business would be well-positioned in today's market. As such Glencore intends to demerge the combined business within the next 24 months, once debt levels are more manageable.

The shares rose 3.0% following the announcement.

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Our view

Glencore's agreed to buy a majority stake in Teck's steelmaking coal business for $6.9bn in cash. The plan now is to spin out its combined coal operations into a new business within the next 24 months.

Clearly management see value in the combination, but there are some short-term headwinds facing the industry. We'd therefore like to see some clearer guidance around the financial impact of the deal.

Headline numbers point to a significant drop in profits over the first half for Glencore. That's largely a result of commodity prices coming back down to earth from the goldilocks conditions seen last year. Looking longer term, there's still plenty of scope for healthy profits.

Glencore has a large industrial portfolio producing metals and minerals. Industrial assets represented over three-quarters of cash profit at the half-year mark. North of a quarter came from metals and minerals, including copper and nickel. These metals are essential for global efforts to reduce carbon emissions and Copper in particular is an area of focus for Glencore.

There's also a marketing business, which acts as a global commodity marketplace and continues to outperform its longer-term targets. Glencore earns a slice of profit capitalising on different prices for the same commodities in different locations or time periods. Performance relies more on volatility in the market than whether prices are high or low, which offers a nice degree of diversification.

It's important to flag now, the Marketing business is extremely complex with a lot of moving parts. Investors should be aware of the risk that brings.

At the half-year mark, net debt was low and the plan was to return cash to investors and bring net debt up to its $10bn target. But given that so much cash is set to be funnelled towards the acquisition of Teck's coal business, we expect to see shareholder distributions take a back seat in the near term. As always, returns are never guaranteed.

Glencore looks well placed to take advantage of the energy transition, both with exposure to metals needed in the new world and its increased coal portfolio that'll continue to be in demand while we transition. The valuation compared to peers isn't too demanding, but we must note recent bribery and market manipulation charges and there's work needed to restore investor confidence in this regard.

Environmental, social and governance (ESG) risk

Mining companies tend to come with relatively high ESG risk. Emissions, effluences and waste, and community relations are key risk drivers in this sector. Carbon emissions, resource use, health and safety and bribery, and corruption are also contributors to ESG risk.

According to Sustainalytics, Glencore's management of material ESG issues is strong.

Glencore's $1.5bn provision for dealing with corruption fines confirms past governance issues, but anti-corruption policies have improved more recently. A 2050 net-zero carbon emissions target is in place along with interim plans to reduce direct, indirect and supply chain emissions by 15% and 50% by 2026 and 2035. How this tallies with its increased investment in coal remains to be seen.

ESG data sourced from Sustainalytics.

Glencore key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 14th November 2023