Glencore: dirty business provides an embarrassment of riches

Glencore has just agreed to pay $180mn to the Democratic Republic of Congo, bringing the costs of settling corruption allegations to $1.66bn. Such moves should hopefully distance the big commodities group from its shady past. Its current embarrassment is one of polluting riches rather than dubious business practices.

Having resisted an activist investor’s pressure to spin off its thermal coal assets, the miner now benefits from their performance. But coal’s success overshadows the prospects for Glencore’s other metals — energy-transition friendly stuff such as copper, zinc and nickel. That may explain its valuation discount to big peers.

Glencore’s coal seam is clear to see. First-half results at the division increased from $912mn last year to $8.9bn in 2022. Coal profits have driven a stock rally.

The bonanza should continue. Lack of investment in coal mining means prices will hold up. Bernstein estimates that coal will account for around $19.5bn of Glencore’s ebitda in 2023, on a group total of $30.6bn. 

That leaves Glencore looking more like a coal play, less like the trader-cum-miner promised at IPO in 2011. At 2.5 times ebitda — broadly in line with listed pure-play Peabody — the coal division’s enterprise value alone accounts for $49bn of Glencore’s total of $100bn. Meanwhile trading, the group’s marketing division, should earn $3bn of 2023 ebitda — some 10 per cent of Glencore’s total — justifying an EV of $21bn. 

Subtracting these two from Glencore’s total EV leaves $30bn for the rest of the group’s mining activities — its future-focused metals — for an implied EV/ebitda group multiple of 3.5 times. That is around a quarter below listed peers BHP Billiton, Rio Tinto and Anglo American.

No wonder Glencore buys its own stock. The group’s capital allocation strategy suggests that — absent new projects or M&A — up to $79bn of cash might be available for dividends and buybacks to 2026, on Bernstein estimates. That should keep the embers glowing on the stock price rally.