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Glencore - volatile markets drive record earnings

Glencore reported half year revenue of $134.4bn, up 43% as both Marketing and Industrial activities performed well.

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Glencore reported half year revenue of $134.4bn, up 43% as both Marketing and Industrial activities performed well. Volatile conditions in the energy markets led to record prices for many coal and gas benchmarks. That helped underlying operating profit almost triple, to $15.4bn.

Gary Nagle, CEO, said: "With few short-term solutions to rebalance global energy markets, coal and LNG prices look set to remain elevated over the second half of the year."

The group announced a special dividend of $0.11 per share, alongside a $3.0bn share buyback.

The shares were broadly flat following the announcement.

View the latest Glencore share price and how to deal

Our view

Glencore posted record half year profits, and investors have been rewarded with bumper shareholder distributions, expected to reach $8.5bn by the end of the year. Events this year have been supportive for both the thermal coal and marketing businesses, which have benefited from soaring, volatile, energy prices.

Commodity prices are somewhat outside Glencore's control, so it's important to get an understanding of the bigger picture.

The 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, but we don't see any major changes in the near term whilst it's so lucrative.

What really makes Glencore stand out is its Marketing business, which acts as a global commodity marketplace and is blossoming in the volatile conditions we're seeing right now. 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 protection if markets are falling but remain volatile.

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.

We must note recent bribery and market manipulation charges. These have been resolved and should fit within the $1.5bn provision set aside. Nonetheless, it's concerning, and new 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.

There's a 9.7% prospective yield on offer, backed up by strong cash generation. Returns at this elevated level are unlikely to stay for long, commodity prices are cyclical and current performance is being boosted by conditions that are unlikely to last. Yields are variable and not guaranteed.

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.

Half Year Results (underlying)

Revenue in Marketing rose from $83.9bn to $115.7bn as the division continued to be supported by periods of market volatility and supply disruption, particularly relating to global energy markets. The Metals and Minerals business saw operating profit fall 17% as market conditions worsened toward the end of the period. However, thanks to the performance of Energy products, divisional operating profit more than doubled to $3.7bn.

Industrial revenue rose from $27.7bn to $40.8bn, driven by significantly higher coal prices which boosted performance in the Energy products business. Revenue was also boosted by the acquisition of the remaining two-thirds stake in the Cerrejón coal mine. Operating profit rose from $3.5bn to $11.7bn.

The group generated free cash flow of $3.9bn, broadly in line with last year as the increase in profit was offset by higher working capital given investment in Marketing. Net debt fell from $6.0bn to $2.3bn.

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: 4th August 2022