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Glencore’s profits soar as it puts aside investigation cash

Mining and trading giant now expects resolutions to US, UK and Brazilian investigations into potentially corrupt conduct around the world
Glencore’s profits soar as it puts aside investigation cash
  • Dividend up as coal, copper and nickel prices send profits soaring
  • Management believes various regulatory issues will be sewed up this year

The metals bull market has once again left Glencore (GLEN) with a jacked-up profit and more than enough cash to up its dividend, announce a share buyback and put more to the side for its various regulatory issues. Thanks to strong coal, copper, cobalt and nickel prices, the mining and trading giant reported a profit attributable to shareholders of $4.97bn (£3.67bn) for 2021, compared with a $1.9bn loss in 2020. 

This was on the back of 43 per cent higher sales, at $203bn, and that adjusted cash profit almost doubled to $21bn. Glencore has set its 2022 dividend level – which it splits between two payments – at $3.4bn, or 26¢ a share. This will be topped up by a $550mn buyback programme. 

Chief executive Gary Nagle said this was driven by the company’s “unique combination” of coal and transition-linked metals like nickel, cobalt and copper. Glencore has stuck with thermal coal while other major miners have sold off these assets, arguing it is better for a listed company facing investor scrutiny to hold on to coal mines. Both metallurgical coal and thermal coal prices surged in 2021 as countries scrambled for supply. 

Overall, the industrial unit – covering Glencore’s mines – saw its adjusted cash profit more than double to $17.1bn, while the trading business increased 11 per cent to $3.7bn on the same metric. The coal contribution to adjusted cash profits went from $1bn in 2021 to $5.6bn, almost all of which came in the second half. 

The average Newcastle spot coal price, a benchmark in the Asia-Pacific region, doubled between 2020 and 2021, to $137 a tonne. At current prices and using the 2022 production forecast of around 120mn tonnes, a 20 per cent increase on last year, the coal division would bring in a cash profit of $10bn this year. 

The higher commodity prices more than made up for higher costs, with a $11bn increase set against $900mn-worth of added costs, including higher power prices in Europe hitting Glencore’s smelters there, while “general inflation” hit hardest in South Africa and Kazakhstan. 

Activist investor Bluebell has called on Glencore to spin off its coal business. Nagle said other investors had come forward to support the company’s holding strategy, and used BlackRock chief executive Larry Fink’s 2022 CEO letter, where he said divestment was the wrong approach, to back up the company’s current strategy. 

That’s not to say the portfolio won’t change: Glencore has 27 mining assets up for sale or under consideration. Nagle also talked up the potential for growing the recycling business, turning Glencore into an “urban miner”. The company has signed a deal with Britishvolt to recycle lithium-ion battery ingredients and has targeted this growing industry. 

There are also likely settlements with various anti-corruption authorities coming this year. Glencore has now put aside $1.5bn as its “best estimate” of the costs of resolving investigations by the  US Department of Justice, Serious Fraud Office and the Brazilian Federal Prosecutor’s Office. These involve potentially corrupt conduct in both its trading and mining businesses. Nagle said the company expected to resolve these investigations this year, while those run by Swiss and Dutch authorities are not part of the new provision. 

Nagle is right about the company’s portfolio being unique. Glencore’s suite of metals is certainly a great mix for current prices. Additionally, as Fink said, there are questions over divestment as the sole model for increasing a company’s green rating. The decision to hold on to the Cerrejon assets in Colombia looks very smart now, but a bull market makes all investment calls look brilliant. In the longer term, we’re not so sure. Hold.

Last IC View: Hold, 325p, 5 Aug 2021

GLENCORE (GLEN)   
ORD PRICE:431pMARKET VALUE:£56.4bn
TOUCH:430.7-431p12-MONTH HIGH:442pLOW: 264p
DIVIDEND YIELD:4.4%PE RATIO:15
NET ASSET VALUE:305ȼNET DEBT:85%
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)*
20172056.9041.020
20182214.6824.020
2019215-0.89-3.00nil
2020142-5.12-14.012.0
20212047.3738.026.0
% change+43--+117
Ex-div:21 Apr   
Payment:20 May   
£1=$1.36 *2021 dividend figure excludes bonus of 4¢ per share. NB: 2021 distribution will be made in two equal tranches of $0.13 over H1 & H2 2022 (ex-date 1 Sept)