'Huge volatility' drives Glencore record earnings

Glencore's (GLEN) strategy of holding on to coal assets and its legacy as a barnstorming trading house have combined to drive it to record profits in 2022, as global conditions turned in its favour.

The company’s adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) figure of $34bn (£28bn) was driven by both the significant uptick in coal prices, as power generators shifted to the fossil fuel after gas prices soared last year following Russia’s invasion of Ukraine and first-half trading profits also linked to the war. Margins were also helped by Glencore buying out the stakes of BHP (BHP) and Anglo American (AAL) at the Cerrejon complex in Colombia. 

Chief executive Gary Nagle said the year was marked by “huge disclocations, huge arbitrage opportunities [and] huge volatility, particularly in the energy market”, he said. 

Outside the coal business, the mining division had an average year as copper prices and production fell. The metals division saw adjusted Ebitda fall by $2.7bn, to $9.3bn, for the year. 

Net debt was effectively down to zero using the company’s favoured measure, which includes almost $27bn in “readily marketable inventories” that don't fall under traditional cash definitions. Glencore’s $10bn net debt goal has opened the door for higher payouts: the base dividend has climbed to 44¢ (to be paid in two equal tranches of 22¢ in H1 and H2 2023), plus another 4¢ per share special dividend and $1.5bn in buybacks. 

The volatility came through in the balance sheet in the $8bn working capital change. This included $2.4bn in net margin calls paid, and $1.9bn from “higher than average payment terms from various Russian suppliers”. 

In the year, Glencore also paid out $900mn to conclude US, UK and Brazilian bribery and corruption investigations. Further payments to Swiss and Dutch authorities could come, although the company said the timing and outcome of those probes “remain uncertain”. 

The company is also more exposed than others in the sector to Russia – it has continued to deliver metals from the company to London Metal Exchange warehouses. Nagle said this would continue as Glencore had been contracted before the war to do so, and there was “nothing abnormal” about trading Russian metals. So-called self-sanctioning means not all buyers will take this metal, potentially creating distortions in the aluminium, copper and nickel markets. 

Even with a varied portfolio, Glencore right now looks like a coal and trading company with some base metals attached, especially with the weaker performance of the metals division and low investment in new supply.

This is likely to balance out in the coming years, but the company’s lower valuation compared with the other major miners (a forward price/earnings ratio of 6.7 times against Anglo's 9.3 times) still reflects investors’ long-term views about the fossil fuel. This is a hard stock to ignore for those chasing dividends, however, even if there is little share price growth from here. Hold. 

Last IC View: Hold, 497p, 28 Oct 2022