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Glencore – profits fall as global energy markets stabilise

Glencore reported full-year revenue down 15% to $217.8bn. Underlying cash profit (EBITDA) fell 50% to $17.1bn.

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The decline in both revenue and profit was largely due to lower prices in the mining portfolio, particularly in the coal market. The marketing division saw similar declines as conditions normalised following record performance in the prior year.

The group generated underlying free cash flow of $6.6bn and net debt rose from $0.1bn to $4.9bn. Capital will now be managed targeting a $5bn net debt cap.

The board has proposed $0.13 per share of distributions (totalling $1.6bn), spread across two payments in June and September of 2024. With the $6.9bn purchase of Elk Valley Resources underway, no additional ‘top-up’ returns are being considered.

The shares fell 5.8% in early trading.

Our view

Performance and sentiment toward Glencore are being largely driven by the thermal coal market. Prices have come down significantly from the highs seen during the energy crisis and its weighing on the bottom line.

Glencore has a large industrial portfolio producing metals and minerals. Industrial assets represented over three-quarters of cash profit last year. The bulk is its coal portfolio but there’s also a big metals and minerals operation, 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.

Glencore is one of the few major minors that’s retained its thermal coal assets. The acquisition of Elk Valley Resources (EVR) and its steelmaking coal portfolio paves the way for a complete separation of coal down the line. The current plan is to bring debt down post-acquisition, which is costing $6.9bn, and then look to de-merging the entire coal portfolio.

Sticking to what we know, EVR is a great asset. It’s one of the world’s leading steelmaking coal businesses (not to be confused with thermal coal) and should generate a lot of cash. There should be plenty flowing around to bring down debt back to the $5bn target and then make a decision on the future – nothing is guaranteed.

Glencore has one of the highest copper exposures compared to peers, and with plans for the coal portfolio taking shape we think the future looks brighter than it has for some time. But the latter still has execution risk and markets are likely to adopt a wait and see mentality until the deal is done. 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, based on previous day’s closing values. 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.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

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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: 21st February 2024