Glencore (GLEN) shareholders are probably sick of America by now. If July’s subpoena from the US Department of Justice wasn’t concerning enough in isolation, investors in the mining giant now face the prospect of the world’s economic sheriff turning bandit. In his half-year summary of commodities markets, chief executive Ivan Glasenberg spoke of “the heightened risk of more aggressive US trade policies” alongside a stronger US dollar, as the pre-eminent threats to Glencore’s specialist subjects – risk assets and emerging markets.
As Mr Glasenberg notes, the result of this rhetoric has been a 13 per cent decline in the GCSI Industrial Metal Index since the start of June. For the profitability of Glencore’s trading arm, this is not necessarily a bad thing. In the first six months of 2018, “generally constructive market conditions” resulted in a 12 per cent rise in adjusted operating income in the black box-like marketing division, and should help full-year operating income land in the top half of a $2.2-3.2bn (£1.7-2.5bn) guidance range.
But for the mining business, a depressed metals index promises little but margin contraction. In the first six months of 2018, double-digit spot price rises for cobalt, nickel, coal, zinc and copper were the lead drivers in a 35 per cent jump in adjusted operating income to $5.1bn.
This has been partly offset – “so far”, Glencore cautiously notes – by relatively contained cost inflation, and modest cost pressure from the dollar. But stacked against uncertainty over Glencore’s operations in the Democratic Republic of Congo (DRC) – where a ramp-up in cobalt and copper output from Katanga “contributed meaningfully” to half-year earnings – the latter half of 2018 looks pinched.
At least the balance sheet now offers some security. Operating cash flow climbed 22 per cent to $6.8bn year-on-year, leaving enough cash to reduce net debt by 16 per cent, despite a significant rise in income taxes and the purchase of Hunter Valley coal mine. Still, the mid-year capital structure might not have been heralded as “the best position” since IPO, had the $1.7bn Hail Creek deal also gone through in the period.
On average, analysts expect adjusted pre-tax profit of $9.8bn and EPS of 49.6¢ in 2018, softening to $9.5bn and 49.4¢ next year.
| GLENCORE (GLEN) | ||||
| ORD PRICE: | 323p | MARKET VALUE: | £ 46.3bn | |
| TOUCH: | 323-323.3p | 12-MONTH HIGH: | 410p | LOW: 303p |
| DIVIDEND YIELD: | 4.8% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 329¢ | NET DEBT: | 19% | |
| Half-year to 30 Jun | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share (¢) | Dividend per share (¢) |
| 2017 | 100 | 2.87 | 17.0 | 3.5 |
| 2018 | 109 | 3.72 | 19.0 | 10 |
| % change | +8 | +30 | +12 | +186 |
| Ex-div: | 6 Sep* | |||
| Payment: | 27 Sep* | |||
| £1=$1.29. *Second tranche of 20¢ distribution for Jersey-listed shares, declared for FY17. | ||||
