Glencore profits tumble on weaker coal prices

Glencore’s (GLEN) future as a coal-mining giant is up in the air thanks to its efforts to buy out Canadian miner Teck Resources (US:TECK) and then split up the combined entities' mines. 

But in the meantime it remains a globally significant producer of the power plant and steelmill feedstock, and first-half profits reflected the decline in prices so far this year. The easing of the energy rush seen a year ago has led to thermal coal and metallurgical coal prices to cool off by between a third and half compared to 2022. The calmer market also knocked trading earnings. 

The company reported adjusted Ebitda for the half of $9.4bn (£7.4bn), down 50 per cent from the record hit a year ago. The trading and mining divisions both saw profits by 50 per cent, in adjusted Ebit terms for the former and adjusted Ebitda terms for the latter. Higher costs also made Glencore’s mines less profitable, with the copper and zinc units hit particularly hard by lower prices and higher costs. A weaker cobalt price also hurt copper earnings, with the formerly hot battery metal now in oversupply. 

On a longer term outlook, the trading division should still be ahead of recent years (excluding 2022’s war-driven profits), with adjusted Ebit of $3.5bn-$4bn expected for the full year.  

For shareholders, the weaker performance will not dampen returns. Glencore will pay a $1bn special dividend early next year, and announced a new $1.2bn buyback programme that will run over the coming six months. A further $2bn has been put aside to cover the potential Teck merger, which management said would be paid to shareholders if no deal is agreed. 

Chief executive Gary Nagle also said the company would not spin off its coal assets in the event that a merger does not happen. “If the majority of our shareholders want to see us spin that out, we’ll spin that out,” he said. “[But] shareholders say we should keep that business within Glencore.” 

The outlook for earnings depends on metals prices – the copper division, for example, would see Ebitda of $5bn for the full year at the current spot price, down from $5.7bn in 2022. At spot, coal would tumble to $6.8bn from $18.6bn last year, although this would still be ahead of 2021. Analysts see overall company cash profits at $19.7bn, 43 per cent down on last year. 

Last year was potentially the perfect environment for Glencore – highly volatile with desperate buying going on due to energy security concerns. There is of course potential for this to happen again, but for now it looks like a return to thinking about managing costs and setting up the portfolio for the next squeeze. Hold. 

Last IC View: Hold, 514p, 15 Feb 2023