Soaring coal price drives Glencore to record profit

Glencore’s (GLEN) commitment to coal has paid off – the far higher prices for the fossil fuel have delivered the mining and trading giant a record half-year profit. The company committed two years ago to holding onto its thermal coal assets while other major miners were selling off or spinning out the assets to get the linked carbon emissions out of their portfolios. 

The half-year adjusted cash profit was $18.9bn (£15.7bn), more than double last year’s figure and $500mn ahead of the consensus forecast. 

The coal price tripling on a year ago to an average of $321 a tonne drove this, alongside higher volumes from Cerrejon, thanks to Glencore increasing its stake in the Colombian coal mines in Colombia up from a third to 100 per cent by buying out former equal partners Anglo American (AAL) and BHP (BHP). 

Glencore chief executive Gary Nagle told analysts the company would stay on the "managed decline" plan for its coal assets despite the tight market. “We made a commitment to the world – it’s right for the world,” he said, albeit he added that, in the “extreme event” of world governments freezing climate change abatement policies, the company would consider upping coal volumes. 

Volatile markets also helped double the company’s trading adjusted operating profit to $3.7bn. 

Timing issues on many of its derivative and supplier contracts, among other factors, knocked $2bn off the total payout to investors, though, as working capital surged. Glencore finance chief Steve Kalmin said he was confident of a “quick release” of this working capital in the second half. 

On top of the pre-announced 13¢ a share dividend (Glencore lays out its annual base dividend in response to the prior year’s performance), the company will launch a new $3bn share buyback programme and pay a special dividend of 11¢ a share. 

The mining division had some difficulties behind the headline coal numbers. Nagle called the operational performance with some assets “disappointing”, and its metals and minerals segment reported a flat adjusted cash profit year on year. The outlook is for tighter margins for the rest of the year as well as cost increases.

Given the coal price strength, Glencore was always going to have a first half to remember – even without sewing up the most pressing bribery and corruption investigations in the US and UK, as it has now done. The question now shifts to whether Glencore is affordable. At a forward PE ratio of just under five times compared to Rio Tinto (RIO) and Anglo on around 6.5 times and BHP on eight times, it looks cheap but this climbs when 2023-2025 earnings per share are plugged in. Like the oil majors, it’s clear the current earnings surge won’t last and so we stick to hold. 

Last IC View: Hold, 530p, 24 May 2022