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Glencore - profits lower than expected, but further distributions

Glencore reported first-half revenue of $107.4bn, down 20%. Underlying cash profit (EBITDA) was down 50% to $9.4bn...

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Glencore reported first-half revenue of $107.4bn, down 20%. Underlying cash profit (EBITDA) was down 50% to $9.4bn. Performance was impacted by the fall in commodity prices from last year's elevated levels, especially in the energy markets, and higher costs.

Net debt rose from $75m to $1.5bn, and $4.0bn of free cash was generated. Glencore paid out $5.2bn through dividends and share buybacks over the period. A further cash distribution of $0.08 per share has been announced, alongside a new $1.2bn buyback programme.

CEO, Gary Nagle, expects a more positive backdrop over the second half and sees demand conditions to be supportive of prices over the longer term.

The shares fell 2.5% in early trading.

View the latest Glencore share price and how to deal

Our view

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

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 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 relatively large coal operation, which doesn't do it any favours with more ESG conscious investors. Management remains committed to running these assets according to the wishes of shareholders. For now, that means taking advantage of the fact coal demand isn't going away anytime soon, while trying to responsibly wind down the assets over time.

In a slight deviation from that strategy, Glencore is actively engaging in talks with Teck Resources to find a way to merge or acquire their coal operations, with plans to spin-out the combined coal operations into a new business. Offers have so far been rejected, and Glencore's been clear that it's in no hurry to take further action if this deal can't happen.

Then there's 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.

Net debt's low and the distribution policy is to return cash to investors to bring net debt back up to its $10bn target, that's why returns can be so generous. As always, returns are never guaranteed and by the very nature of the policy, returns can and will decline as debt levels move higher.

Glencore looks well placed to take advantage of the energy transition, both with exposure to metals needed in the new world and its 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.

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
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: 8th August 2023