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Glencore - production guidance disappoints

In its annual investor update, Glencore released production and profit guidance for 2023 that came in below market expectations.

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In its annual investor update, Glencore released production and profit guidance for 2023 that came in below market expectations.

Production guidance for 2023-25 was broadly lower than market consensus. 2023 Copper production is expected to fall 2%, largely driven by troubles at its Katanga mine.

Glencore is looking to close 12 coal mines by 2035, as part of plans to reduce CO2 emissions by 50% over that period.

Capital expenditure for 2023 is expected to come in around $6bn, up from the expected $4.9bn for the current year. Significant inflationary pressures mean the cost of ongoing maintenance and expansionary projects has increased.

The group's guided for $28.7bn of underlying EBITDA and free cash flow of $14.6bn in 2023, based on current prices. That's a significant drop from previous market consensus.

There was no update to guidance for the current financial year.

The shares were down 1.4% on the day of the announcement.

View the latest Glencore share price and how to deal

Our view

Back at the half year mark, Glencore posted record profits and investors have been rewarded with bumper shareholder distributions. Events this year have been supportive for both the thermal coal and marketing businesses, which have benefited from soaring, volatile, energy prices.

This year looks like it'll be the peak. New guidance for production over the next few years was materially below market consensus and higher costs mean margins won't be as frothy. But there's still plenty of scope for cash generation and the $14.6bn expected in 2023 is still a mammoth amount.

Glencore's business model is based on two key areas. The first, like your run of the mill miner, is a large industrial portfolio producing metals and minerals.

Industrial assets represented three quarters of operating profit at the half year mark. Just north of a third came from metals and minerals, including copper and nickel. These metals are essential for global efforts to reduce carbon emissions and longer-term demand's likely to keep going up as economies transition.

Glencore also has a relatively large coal operation, which doesn't do it any favours with more ESG conscious investors. However, it's reaping the rewards of the turmoil in energy markets as coal prices soar. Glencore's pledged an orderly reduction in coal output, which will arguably be a tailwind for prices in a market that's already tight on supply.

Then there's a marketing business, which acts as a global commodity marketplace and is blossoming in volatile conditions. Customer orders are filled, either through its own products or a third party's, and then delivered. 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. It's a low-margin business model but gives the wider group some diversification if markets are falling.

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.

Healthy conditions over the last couple of years have helped bring the balance sheet into good shape. Net debt's down to $2.3bn, well below the target of $10bn. The group aims to return cash to investors when available to bring net debt back to target, that's why returns can be so generous in current conditions, though there are no guarantees.

There's an 8.0% prospective yield on offer, backed up by strong cash generation in current conditions. Though remember, that's dependant on ongoing cash generation and balance sheet strength - both of which can change if conditions turn. Yields are variable and not guaranteed.

We must note recent bribery and market manipulation charges highlight significant governance risks. CEO, Gary Nagle, has some work to do to restore investor confidence in this regard.

Glencore offers something different to its peers, with the addition of its marketing arm offering an avenue for profit in a range of conditions. The group trades ahead of its long-term price/book value, reflecting the healthy conditions right now.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 7th December 2022