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For months now, we’ve been thermal coal price bulls, partly because Indonesia has effectively restricted its exports by selling coal at prices above market-determined equilibria. It’s a robust case. Problem is, this pricing policy was actually dumped weeks ago. Here, we explain what prompted this poorly reported backflip + review S/D/price risks for this 1Btpa global bulk/energy trade...
GLEN TGA KIST SQZ GLEN TGA KIST SQZ
Putting a floor under the copper business, improving confidence necessary Glencore had another disappointing 1H25 of copper production vs both the market (1Q was -18% and 2Q was -9% consensus) and their internal expectations (were aiming for a 45/55 split initially, now see it 40/60 on the lower half of the guidance range). The company does still have a large copper portfolio with 865kt of production forecast for 2025E (guidance 850-890kt) but it is -44% vs its peak in 2014 (figure 1). The declining volumes and string of quarterly misses has created the perception in the market that they are poor operators. Glencore provides multi-year production guidance which it updates on an annual basis and comparing the updates from YE19 through YE23 vs subsequent actual reported production, the performance has been poor. On average the one-year ahead performance has been within the guidance range most years, missing the mid-point by -4%. However, extending that into two and three years ahead, the average miss increased to -12% and -17%. Once that''s done, can turn to greenfield growth The results call unsurprisingly struck a positive tone, expecting 2025 to be the bottom in their copper production, and guiding to a +15% growth in copper production by 2028 to return to the 1Mtpa level. Given our statements in the paragraph above, the market is unlikely to fully price this ramp up into shares until more consistency is seen in operational performance. The implied 50% increase in copper production H2 vs H1 necessary to hit 2025 guidance will be a good first test. El Pachon is a greenfield copper project and represents c33% of Glencore''s ambition to grow its copper production by an incremental 1Mtpa. Considering the company are not known mine builders, the focus should first be stabilising the current portfolio (and delivering on the growth promised), then the lower-risk brownfield options (of which Glencore does also have in its portfolio) before more ambitious...
Glencore plc
What happened? Glencore hosted its conference call following release of 1H25 financial results this morning (see our flash note here). They struck a positive tone on the trading business avoiding the COMEX premium collapse, confidence in the copper uplift into H2 and further momentum in the met coal market in the coming months. BNPP Exane View: With the recent COMEX premium collapse there had been some concerns that Glencore would have found itself on the wrong side of the trade. Positively on the call CEO Gary Nagle noted they had been positioned carefully around the trade and had been banking on one single outcome (zero, 25%, 50% tariff for example) and that they came out of it ''just fine.'' Copper was called out for a strong contribution to marketing in 1H25 but was much less so COMEX driven and more physical trade dislocations and regional arbitrage. Conversely thermal and steelmaking coal''s contribution marketing in 1H25 was very disappointing (USD 40m, -88% y/y) but tighter markets into 2H25 should provide more opportunity. With copper production guided to be a 40/60 split h/h in 2025, it requires a meaningful step higher across the assets which has been guided to be a primarily grade driven improvement. They talked down these concerns and several questions about KCC, noting that the geotech event in 2H24 required development/remediation activities in 1H25 and are now back into fresh ore. On the seaborne met coal market, the USD 10-15/t bounce off the lows was attributed to anti-involution activities in China. Glencore expects Chinese steel exports (which are more reliant on domestic coal and Mongolian semi-soft) to begin to decrease which would shift market share back towards seaborne coking coal and further support pricing in the months ahead. On a potential asset level tie-up of Collahuasi/QB2, they noted their belief that the synergies could exceed what was announced for Los Bronces/Andina (USD 5bn NPV) but that momentum for the talks...
What happened? Glencore delivered an in-line with company-compiled consensus EBITDA of USD 5.4bn while net income was impacted by impairments at Cerrejon and Ferroalloys. Operating cash flow was weaker than expected which filtered down into net debt of USD 14.5bn being +12% above consensus. A call will be held at 8am UK time to discuss the results. BNPP Exane View: Glencore reported 1H25 EBITDA of USD 5.4bn, in-line with company compiled consensus and -3% vs BNPPE. At the divisional level, marketing, zinc and Ferroalloys were ahead of expectations while copper and nickel were laggards. Net income of -USD 655m was well below our forecast of +USD 653m as there were slightly over USD 1bn in impairments, primarily related to Cerrejon taking 5-10Mt offline in response to the oversupplied seaborne coal market. Net debt of USD 14.5bn was +12% vs consensus and +9% vs BNPPE. There was a modest decrease in 2025 cash cost guidance for copper (-2% to USD 1.74/lb) and zinc moving to a -USD 0.12/lb credit vs USD 0.06/lb prior. The company expects a stronger H2 cash flow with the 40/60 split in copper production, some unwind of WC and beginning to execute on cost savings target. The analysis of a potential alternative listing was complete and at this time it isn''t believed to be value accretive but will continue to monitor if that cost/benefit changes. As expected, with net debt over the USD 10bn level, there were no top up shareholder returns.
Looking ahead to next week Glencore will report 1H25 interim results next week (6 August), having already disclosed a significant amount of the building blocks to forecast earnings (production, realised prices, expected cash costs). We forecast 1H25 EBITDA of USD 5.6bn, -9% vs current Bloomberg consensus. Net debt is forecast to increase to USD 13.3bn (+19% h/h, -4% vs consensus). With net debt above the USD 10bn level, having completed the USD 1bn buyback announced at final results by mid-June and announcing a further USD 1bn buyback several weeks ago tied to a portion of the equity component from the Bunge-Viterra transaction, there should be no further buyback announced with interim results. Guidance unlikely to change vs what we heard this week Glencore adjusted production guidance within its previous ranges this week with 2Q25 production results. Copper production has clearly disappointed, both the market and Glencore''s internal expectations. Going into the year it was expected to be a 45/55 h/h split, which moved to 42/58 at 1Q25 production and subsequently 40/60 split now at 2Q25 production (and having narrowed the range to lower half of the prior band). To reach the mid-point of the new range of 850-890kt will require 526kt of production in 2H25 (+8% y/y vs -26% y/y in 1H25). Glencore walked through the assets and their expected H2 performance and the common thread is higher grades h/h. Collahuasi is a bit of an outlier as it is also the lifting of water restrictions eased by the new desalination plant and fresh ore vs low grade stockpiles which Anglo American (+) (the other partner at the mine) noted had higher levels of oxidised ore than expected during the period. Estimates come down modestly, TP unchanged Pre results we trim our 2025-2027 EBITDA forecasts by -2%. While Glencore did notably take down copper production guidance to the lower half of the range, we (and consensus) were already there. Reiterate Outperform with TP of 410p...
What happened? 2Q25 copper production missed while zinc and coal production were stronger than expected. 2025 production guidance was narrowed across a couple of metals, notably targeting the lower half of copper production guidance now. Guidance for Marketing adjusted EBIT was revised up. There is no call associated with the production results release. BNPP Exane View: 2Q25 copper production of 176kt was a -9% miss vs. company compiled consensus, primarily due to lower ore mining rates, head grades and overall recoveries at Collahuasi, Antapaccay, and KCC. Nickel production was -8% below company compiled consensus, while Ferrochrome production was -46% below Bloomberg consensus amid proactive management in response to weak market conditions. 2Q25 Zinc production of 252kt was a +3% beat vs. company compiled consensus, reflecting higher zinc grades from Antamina and stronger Australian production. Coal volumes were +6% ahead of expectations driven by a +10% beat in thermal coal production. Cobalt production was +31% ahead of expectations, reflecting higher grades and volumes at Mutanda. Glencore flagged that H1 unit cash costs for copper will be elevated at USD2.25/lb (no consensus) but expecting the H2 volume uplift + cobalt by-product credits to pull back down to take full-year broadly in-line with their previous outcome of USD1.78/lb. Copper realised at USD4.10/lb is light of consensus at USD4.24/lb. Zinc at USD1.25/lb is better than consensus at USD1.18/lb 2025 production guidance range was narrowed across a couple of metals notably targeting the lower half of copper production guidance now. Our forecasts and consensus already moved towards the low end (see table overleaf). Guidance for Marketing adjusted EBIT was revised up from USD2.2-3.2bn to USD2.3-3.5bn.
Last week we visited Glencore''s EVR assets in BC, Canada, specifically the Fording River and Elkview coking coal mines and Neptune Terminal. Glencore gave a strong defence of the coking coals markets, estimating c25% of seaborne coking coal is underwater on a cash cost + sustaining capex basis. Prices have bounced off this support level a couple times in the last decade, but it is not always a quick turnaround. Entering weak seasonal steel demand in China and looming threat of production cuts in 2H25, we would not anticipate a snapback in pricing in the short-term. Synergies came in ahead of our expectations We previously estimated approximately USD 200m in annual synergies from the integration of EVR into Glencore. In total, management laid out USD 400m in upside which could be achieved over a 2 to 3-year period. Notably, this is in addition to the cost improvements already achieved in 2H24. Asset quality in focus EVR''s product mix is 75% high quality hard coking coal and 25% a mixture of semi-hard coking coal, semi-soft coking coal and pulverised coal injection (PCI). Its overall quality compares well with Australian coking coals, measuring high on both coke strength after reaction (CSR) and drum strength. The quality of the coal is well positioned for medium/long-term steel demand growth in India and also new blast furnaces being developed in southeast Asia which are up to 2x the size of operating furnaces and will underpin demand for higher CSR coals. Shares have underperformed, what to look for in the near-term Glencore shares have declined nearly 20% YTD, underperforming its major mining peers which are down mid to high single digit %. The Viterra-Bunge transaction is scheduled to close this week which could free up to USD 3bn in capital allocated towards an ad-hoc buyback. While expected by the market, it would still be positive as it provides an incremental buying opportunity of its shares. Reiterate Outperform with 410p target price.
Glencore closed the acquisition of its 77% stake in EVR for USD 6.9bn on 11 July 2024. Nearly a year on, we will be visiting the assets on 25-27 June. EVR''s product mix is 75% high quality hard coking coal, measuring high on both CSR and drum strength and comparing well against Australian coking coals. Glencore''s copper equivalent production is projected to rise +4% by 2027 vs 2024. The integration of EVR is the largest driver to the growth, contributing c300kt incremental copper equivalent volume over the period. Early signs of improvement Since taking over ownership of the assets in July 2024, Glencore has already demonstrated early success in operational improvement. 2H24 cash costs declined -14% h/h to the lowest level in three years. Quarterly coal production in 4Q24 of 6.8Mt was also the highest level in seven years. Capex at EVR will be elevated in 2025-2027 (average USD 1.4bn per annum) before declining to USD 1.1bn thereafter. The investments will focus on water treatment facilities, extra haul trucks/shovels to improve material movement capacity and extensive deferred stripping. Estimate cUSD 200m in annual EBITDA synergies Glencore is expected to provide an update on synergies on the trip. We estimate approximately USD 200m per annum at EBITDA, focused on marketing, procurement, operating and overhead optimisation. Shares have lagged but we remain Outperform Glencore shares have declined nearly 20% YTD, underperforming major mining peers which are down mid-single digit %. Closure of the Bunge/Viterra deal could bring forward up to USD 3bn in share buybacks in the near-term. Thermal and coal prices have bounded off cost support levels but will need further momentum for Glencore''s shareholder returns to return to a double digit yield. Reiterate Outperform with 410p TP.
Q1 often starts below the annual run rate but 1Q25 copper production was likely below GLEN''s internal expectations as they now see it being a 42/58 h/h split (vs prior 45/55). While a big pickup is required in H2 to meet the mid-point of the full-year range (850-910kt), the average quarterly run-rate in H2 of 255kt would only be +4% y/y vs 2H24. We do move our copper volumes down into the lower half of the range (865kt) in part to derisk some of the implied ramp up. A slower start than expected in copper 1Q25 copper production of 168kt was -30% y/y as it faced headwinds from lower mining rates, grades and recoveries across Collahuasi, Antapaccay and KCC. The rebound in production at those assets is expected to be driven by additional trucks + water availability (Collahuasi), lowering strip ratio (Antapaccay) and transition from low grade stockpiles back to run of mine feed (KCC). Eyeing a big Q2 bounce in zinc Similarly, zinc got off to a slower start in Q1 with 214kt of production implying 22% of full-year midpoint of 960kt. GLEN expects that 1H25 should represent 51% of annual production, implying a +29% q/q increase to 276kt in 2Q25. Without pushing more of the production split into 2H25, GLEN should have good visibility on grade sequencing being a tailwind near-term. For 2025 as a whole, the group level increase (BNPPE +6% y/y) is mostly Antamina as mining moves through higher-grade areas. Nonmaterial estimate revisions Following 1Q25 production results, we decrease our 2025 and 2026 EBITDA forecasts by -1% (figure 1 overleaf). Reiterate Outperform with 410p TP.
What happened? The -30% y/y decline in copper production in 1Q25 reflected multiple headwinds across multiple mines. While buyside expectations were below the sellside''s (-18% miss vs company compiled consensus) this result also likely trailed GLEN''s internal expectations, in our opinion. There is no call associated with the production results release. GLEN will report 2Q25 production on 30 July. BNPP Exane View: 1Q25 copper production of 168kt was an -18% miss vs both company compiled and Bloomberg consensus. It was also a -30% y/y decline with lower mining rates, grades and recoveries at multiple assets. Buyside expectations were below sellside''s going into the print. We believe this result likely came in below GLEN''s internal expectations as they previously expected a 45/55 H1/H2 split in copper production which has now been adjusted to 42/58. Production from zinc, nickel and ferrochrome all missed expectations by mid-single digit % on average. Conversely, cobalt was +4% ahead of expectations. Cobalt produced at KCC and Mutanda are being stockpiled in country and will be sold once the export ban is removed. Coal volumes were slightly ahead of expectations with thermal coal +1% and coking coal +4% vs company compiled consensus. 2025 production guidance remains unchanged except for a c5% reduction in energy coal which reflects the previously announced reduction of volumes at Cerrejon. Guidance for Marketing''s adjusted EBIT is around the middle of the long-term USD 2.2-3.2bn per annum range (Bloomberg consensus USD 3.1bn). Speaking on tariffs, the report notes that primary commodity trade routes to date have not been meaningfully disrupted. However, the proposed tariffs are expected to create some dislocation and physical trade flow re-orientation, which could present opportunities for the Marketing business.
Global commodity markets are being chopped up this week by the roll-out of 10-25% tariffs on all US imports from its key trading partners – Canada-Mexico-China. The policy directly hits steel & aluminium (lifts US prices; undermines ex-US prices); indirectly/briefly lifts prices of all other commodities (via tariff-related hit to USD/rates). Got an update here, on key market moves…
GLEN BHP RIO AAL ANTO
We have updated our estimates to correct for the calculation of 2027 FCF as displayed below and on CUBE. Underlying assumptions/estimates are unchanged and there is no impact to valuation. We do not consider the changes to be material; our rating is unchanged.
This week, the DRC govt. decided to halt the export of its cobalt to the world. It’s a big deal for this tiny metal market, since the DRC ships 85% of global supply. Why do it? It wants to hike its price. So, this is just like Glencore’s Mutanda closure of 2019. Problem is, Glencore’s strategy failed. This up-scaled govt.-led version will too…
Glencore’s not happy. Its long-standing cash cow division of thermal coal is struggling with a surprise price crunch. We’re frustrated too: our price forecast is wrong. Before Christmas, we blamed it on China’s subdued economic activity. Seemed the right call, since it burns half the world’s coal. Turns out, that was just half the story…
Glencore plc Thungela Resources Limited
Back to basics Glencore resumed its buyback as it pulled forward (relative to our expectations) when it would take into account the Viterra proceeds. While it can be debated whether the underlying was a disappointment (we would say yes), we do believe it''s an important step that the buyback was resumed and mgmt. have signalled the desire to do more ad hoc and at 1H25 results, metals price and operational performance dependent of course. The potential ad hoc would most likely be a way to monetise a portion of the approx. USD 3bn equity component in Bunge (NC) it will receive that would be subject to a lock up. Mgmt also highlighted their intention to support the thermal coal market by taking off some of their volumes during 1Q25. The Marketing business has reportedly gotten off to a good start of the year considering the volatility and dislocations YTD. US relisting a real possibility Mgmt proactively raised the fact that analysis is being done internally evaluating the potential relisting away from London towards the US (later acknowledged to be the top candidate). While not willing to definitely say it would relist or when that decision would be made (we think unlikely in 1H25) work thus far has shown estimated friction costs would not be material. As we wrote last week (here) we think it could be a positive catalyst given valuation discrepancies between the two markets, UK/European views on coal and successful case studies in other sectors. Estimate revisions Unlike its major mining peers, Glencore held back its 2025 guidance to announce everything (production, cash costs, capex) to its 2H24 financials release which makes our earnings revisions more meaningful. We cut 2025 EBITDA by -10% as we reflect the updated guidance (copper and coal cut, zinc upgraded) and 2026/2027 by -5% (detailed variance table overleaf). The earnings downgrades drive a -4% cut to our TP to 460p, which is derived via NPV and ROCE/WACC rather than near-term multiples....
What happened? A lot to get through this morning with Glencore. Two items have been worse than consensus, as feared by investors in our recent conversations, the capex guide and copper production guidance. 2025 marketing EBIT guide looks in-line to us. The total shareholder returns was front-loaded (relative to expectations) by the Viterra transaction proceeds and underlying is probably slightly underwhelming vs expectations. Glencore will host a call at 8:30am UK time to discuss the results. BNPP Exane View: Glencore reported 2H24 adjusted EBITDA of 8.0bn, -3% vs Visible Alpha consensus. The miss was primarily driven by Copper with the Coal division in-line. Marketing''s adjusted EBITDA of USD 2.0bn was slightly ahead (+5%) vs consensus. Net debt of USD 11.2bn was +36% above consensus. Shareholder returns of USD 2.2bn were announced (inclusive of USD 1bn buyback) or USD 0.182/sh vs consensus of USD 0.13/sh and BNPPE of USD 0.17/sh. The buyback does include the anticipation of the cash component of the Viterra sale to Bunge which we, and we believe the street, had removed from expectations. We would view the higher-than-expect returns announcement today more as a timing impact having pulled forward those proceeds rather than the total amount actually being better than expected. 2025 copper production guidance of 850-910kt is -7% vs consensus and probably meeting recent investor fears that the guide would come in light. 2026 of 930kt is -3% vs consensus. The longer-term 2028 guide of returning to 1.0Mt is better than expected though (consensus 950kt). Guidance for 2025 marketing EBIT of USD 3.0bn and in-line with BNPPEe and consensus at USD 3.0bn. Guidance for 2025 capex is USD6.6bn vs BNPPEe of USD 6.4bn and consensus of USD 6.0bn, inclusive of USD 1.4bn per annum of capex earmarked for EVR (vs the 2H24 spend of USD 0.5bn). Consensus capex estimates looking too low were a point of our recent discussions with investors.
In the 1988 comedy Coming to America, Prince Akeem quotes Nietzsche, saying, ''No journey is too great when one finds what he seeks''. Could another from the African continent (South African CEO Gary Nagle) also be looking at a move to America in search of what he desires (an improved company valuation)? We look at the opportunity of Glencore moving its primary listing to the US. Does London make sense any longer? While there''s obviously significant time and cost associated with moving a listing, trading volumes on the LSE for the large miners (RIO, GLEN, AAL, ANTO) have declined by 50% in the last two years vs their ten-year average before that. Compare that to the US (FCX, VALE, TECK) at -25% and Australia (BHP) at -7% and the differences are glaring. European and UK views on ESG/coal are also a clear headwind, and with Glencore planning to hold onto its coal business, this also is unlikely to go away. Amongst its large mining peers, Glencore has just 4% of its shareholder base in the UK, with only BHP as low, and they moved the primary listing to Australia a few years ago. Motivation and a potential USD 48-89bn valuation increase Prior to 2016, Glencore traded at a premium vs the SXPP and a basket of its main peers. Now, it trades at around a 20% discount on consensus forward EV/EBITDA. Beyond just getting the share price higher, which is obviously a major benefit, a US listing could also increase optionality to use paper in potential deals. Looking at either CRH''s re-rating following its listing move or the multiple discrepancy between US vs European supermajors, we see clear and significant potential value creation from a US-listing led multiple expansion. We estimate multiple expansion over a multi-year average to be 2.5-4.6x turns under those two examples. Applying those increased multiples to our 2025-2026 EBITDA forecasts would create USD 48-89bn in valuation increase, equivalent to 93-171% of Glencore''s current market cap. Even taking a...
We update our model following 4Q24 production and detailed disclosure around cost guidance and realised prices. The Viterra-Bunge transaction now looks unlikely, but still could happen, to close before 2H24 financial results on 19 February. Resetting shareholder return expectations As we reset our earnings estimates, detailed below, there is a clear knock-on impact to shareholder returns. We now forecast a YE24 base dividend of USD1.7bn (USD1bn from Marketing + 25% industrials FCF per their formula). We forecast a top up payment of approximately USD350m, after adjusting for the base dividend provision and lease liability. The total return amounts to USD0.17/sh (consensus USD0.16/sh). As the Viterra-Bunge transaction has received Canadian approval but not yet Chinese, we have delayed the USD1bn of cash proceeds to Glencore which was previously in our YE24 return assumption. If that transaction closes before 19 Feb, it would be included in the calculation and increase our top up forecast by an equivalent amount. For now, our base case is that it will be an ad hoc top up once the deal is closed. Recent production report helps to lock down 2H24 estimates Considering the amount of disclosure Glencore provides alongside its 4Q24 production report (production, realised prices, cash costs), we can fairly accurately lock down our EBITDA forecasts which are now USD14.5bn for FY24 (-3% vs consensus) and USD8.2bn for 2H24 (-5% vs consensus, Figure 1). Following 4Q24 production results, which we had yet to mark-to-market for Q4 actual metal prices, our 2024 EBITDA decreases by -13%. This is primarily on coal price realisations and portfolio mix adjustments. There are other moving parts, as detailed in Figure 2, but this is the most significant variable. We make modest adjustments to our 2025 and 2026 operational assumptions but these lead to a much more muted -2% and -1% impact on EBITDA. Considering the earnings downgrades, we decrease our TP to 480p (prev...
What happened? Glencore reported 4Q24 production largely in-line with consensus and within the initially guided ranges. Cash costs were elevated for zinc but it''s 10% of Industrial EBITDA while coking cash costs were -11% below prior guidance as EVR integration is ongoing. Both thermal coal and coking coal have larger portfolio adjustments (negative) than previous guidance for FY24. 2H24 financial results will be released on 19 February BNPP Exane View: Glencore reported 4Q24 production largely in-line with consensus estimates; cobalt +11%, zinc +6%, coal in-line, copper -1%, nickel -2%, ferrochrome -2%. Please see the variance table below. Copper production was effectively flat q/q with its African operations increasing sequentially and offsetting the weakness in other operations. Unit cash costs for FY24 have come in slightly above expectations on an earnings mix perspective. Copper cash costs of USD 1.69/lb were +4% above the prior guidance and thermal coal of USD 68.1/t was -1% vs prior. Coking coal at USD 115.6/t was notably below prior guidance (-11%) while zinc was on the other end at USD 0.30/lb (+62% above prior). The zinc performance was effectively flat h/h vs the prior implied performance for a large step down in H2. Realised pricing looks fine for copper, achieving 95% above benchmark LME vs prior expectation for 96%. However realisations for coal look soft with price adjustments (negative) of USD 39/t for coking coal (vs prior guide of USD 28/t) and USD 34/t (vs prior guidance of US 28/t). 2025 production guidance was not communicated with 4Q24 production results, a deviation to what was done last year. Instead, it will be communicated alongside costs and capex guidance with 2H24 financial results on 19 February. It''s hard to know whether there is anything to read into this change of reporting timeline but it may embolden some of the investors we speak to that hold the view that 2025 production guidance is likely to come in weak. ...
We update post 3Q24 production results, with just modest estimate revisions. Glencore looks set to resume its top up shareholder returns at year-end (BNPPE USD 3bn). 3Q24 better than feared, uplift needed into 4Q24 As with many miners, Glencore is expecting a stronger end to the year. We''ve compared the required Q4 uplift (figure 1) required to hit Glencore''s production guidance (figure 3) and upper/mid/lower outcome as indicated. Cobalt (+27%) requires the steepest increase while copper is flat (+1%) into Q4. Still forecasting USD 3bn in top up shareholder returns at year-end Given the modest earnings forecast revisions, we continue to estimate USD 3bn in top up shareholder returns to be announced alongside year-end results (February 2025). Beyond operating performance in 4Q24 and WC movements, there will be two additional factors to consider - timing of Viterra sale to Bunge and potential purchase of Anglo coking coal assets. With the Viterra transaction, which we have assumed brings in USD 1bn in cash proceeds in 2H24 per guidance, the recent Bunge earnings call hinted it may fall into early 2025. For its provisional net debt calculation, it will matter more whether the sale completes before Glencore reports results rather than 31 December. Second, will be whether Glencore potentially pursues a purchase of Anglo American''s (+) coking coal assets, in their entirety or with another party. Current market expectations for the portfolio are cUSD3.5bn. Modest estimate revisions, no change to TP Post 3Q24 production results, we make only modest revisions to our estimates, with our 2024-2026 EBITDA forecasts declining by 1% on average (variance table overleaf). This leads to no change in our TP (515p) and reiterate Outperform.
That’s odd. Just 5-10 years ago, if China’s domestic coal mining rate slowed even a little bit, we would have been overrun with investor queries on global supply/price risk. This year, not only has China’s local supply growth totally stalled, there are brand new risks for output/exports of Colombia and Russia too. But here in sunny London, we’re getting no investor calls or emails … perhaps ESG-related mandates deter investor engagement? Anyway, right now, we’re ‘constructive’ on the long-term price outlook, because there’s so little investment in new supply, ex-China. But could our persistent forecast trade surplus get wiped out by collapsing supply? Not sure. So here, we consider the new supply risks vs. our existing forecasts – by applying some ‘reasonable’ assumptions…
What happened? A largely in-line 3Q24 production report should be taken well as most investors we have recently spoken to had been expecting a weak contribution from copper and a potential guidance downgrade. YTD copper production of 705kt is currently tracking towards the lower end of the guidance range (950-1,010kt) but 3Q24 showed a +9% sequential uplift. Hitting the mid-point of the range will require a +13% q/q uplift into 4Q24. EVR had a solid first quarter of production (5.7Mt) following deal closure in early July. No call will be held alongside the release. BNPP Exane View: Copper production of 243kt was in-line with company compiled consensus, representing a +9% sequential uplift. Relative to expectations, Africa came in lighter than expected while ex-Africa (Collahuasi and Antamina) with both benefiting from higher feed grades and volumes. Total coal production of 33.6Mt was also in-line with expectations, both broken down by thermal and coking coal. It was the first contribution from EVR with 5.7Mt of production from its 82 days of contribution following deal closure. Thermal coal of 25.9Mt was -8% y/y primarily from Cerrejon due to weather impacts and permitting delays hitting planned mine sequencing. Zinc production of 226kt was -2% vs consensus with a +7% sequential increase driven by the ramp-up of Zhairem. Nickel production of 18.1kt was -14% vs consensus. Cobalt was +10% vs consensus and ferrochrome was +6% vs consensus. There were no changes to 2024 production guidance across metals. Similarly, marketing guidance remains in the USD 3.0-2.5bn adjusted EBIT range.
A bunch of unrelated mine disruptions, over just the last few weeks, has extended zinc’s 2024 price rally. It has also confirmed what those close to this industry have been saying for years: that zinc mine supply growth is at risk, because there’s little in its project pipeline. Big problem for Zinc World, since >80% of supply comes from its mines…
Glencore plc BHP Group Ltd
Canada''s major railway operators look set to strike (22 August) which would restrict Glencore''s ability to export its coal from recently acquired EVR. We estimate each week of lost shipments is cUSD60m of EBITDA (1% of our 2H24 group forecast). Canadian back-to-work legislation will likely restrict the length of the strike, assuming it goes ahead. Looming railway strike could disrupt coal shipments from recently acquired Elk Valley Glencore''s recently acquired Elk Valley Resources (EVR) transports its coal via Canadian Pacific''s railway system to the Ridley (Prince Rupert) and Neptune (North Vancouver) terminals, to access the export markets. For 2H24, we forecast EVR''s EBITDA contribution at USD1.5bn (14% of group). Each week of lost shipments, we estimate would reduce EBITDA by cUSD60m (0.6% of 2H24 group EBITDA forecast) and lead to associated build-up inventories. Talks between both of Canada''s main railway companies, Canadian National Railway and Canadian Pacific Kansas City, and the Teamsters union have reached a deadlock with either side accusing the other of bad faith. The railway companies have said they will start locking out workers next week (22 August) if a labour deal cannot be reached. Back-to-work legislation likely caps length of the strike Usually a tool of last resort, back-to-work legislation can be passed at the federal or provincial level in an effort to end a labour-management dispute. It was first used in 1950, coincidentally when Canadian railway unions launched a nationwide strike, and had its power reinforced by the Supreme Court in 1987. It can be used to end a strike or lockout in an industry that the government decides is essential to the operation of the economy. It has been used 30 times since is introduction and has been used to end strikes by industries including railways, grain handlers, port workers, postal service and air traffic controllers. Industry groups have been lobbying Canadian Prime Minister Justin...
Coal is here to stay, to no surprise. With big cash outflows completed in 2H24 (ie EVR acquisition), expectations for top-ups of shareholder returns will be elevated into YE24 results (Feb 2025). We now estimate GLEN could announce USD 3.0bn in top up shareholder retaurns at YE24 results. Coal is here to stay In what was an expected move, arguably quicker than expected prior to last week''s indication that an announcement would be made with 1H24 result, GLEN has decided to no longer spin out the coal business. Rather, its feedback from the investor base was to use the forward coal cash flows to fund growth in its transition metals portfolio, particularly copper, as well as ''accelerate and optimise'' the return of excess cash flows to shareholders. GLEN has allocated up to USD 400m between 2024-2026 for feasibility studies and early works on its Mara and El Pachon copper projects in Argentina. Top-up shareholder returns to resume, just not yet GLEN''s proforma 1H24 net debt of USD 10.3bn was just shy of the revised USD 10bn net debt cap, which had been temporarily reduced to USD 5bn during the EVR acquisition process. However the report, and the tone on the call signalled optimism that GLEN is well positioned to resume top-up payments (incl buybacks) come 2H24 results in February 2025. The integration of EVR and being a bigger business means there could be some upside to the net debt cap, but unlikely to be raised in the near-term. Another aspect to be explored would be the holding of Bunge (est USD 3bn) post its acquisition of Viterra, which they would look monetise it over time and whether a portion of that holding could be netted against the proforma net debt calculation. Earnings revisions We trim 2024-26 EBITDA forecasts by low single digit % given the lower-than-expected 1H24 result and the (upward) revised unit cash cost guidance across copper, zinc and thermal coal. Detailed variance table overleaf. Lower TP to 525p (prev 555p).
What happened? 1H24 EBITDA of USD 6.3bn was -7% vs VA consensus and while we think buyside consensus was probably a bit below the VA figure, it still would have been light of expectations. The decision not to spin the coal business and no top-up shareholder returns were our base case going into the event. A call will be held at 8am UK time this morning to discuss the results. BNPP Exane View: EBITDA miss - GLEN reported 1H24 EBITDA of USD 6.3bn, -7% vs Visible Alpha consensus. There was no particular division driving the miss, rather multiple each coming in slightly below, which ultimately led to the softer-than-expected result. Reported net income of -USD233m was impacted by USD1.7bn of significant items including a USD1bn impairment (incl SA coal and Koniambo). Net debt of USD 3.6bn was in-line with consensus. A more detailed variance table can be found below. No coal spin - As expected, GLEN has decided to retain the coal business and no longer plans to spin it out, citing shareholder preference to retain the cash flows generated in coal to fund other components of the business. Leads to net debt cap raise but no buyback - The net debt limit has been raised back to USD 10bn (prior USD 5bn), the historical level prior to the acquisition of EVR. Considering GLEN''s shareholder returns top-up framework, the 1H24 net debt of USD 3.6bn plus the 2H24 provisions create a pro forma USD 10.3bn net debt figure, which is slightly above the cap and leads to no additional top up. However, the report notes being well positioned for top-up returns at 2H24 considering the cash flow outlook and USD 1bn in Viterra cash disposal proceeds expected to be received in the next several months. Near-term macro uncertainties - The outlook in many ways highlights the current market''s concerns; sluggish China with a lower-than-expected policy stimulus, reduced AI sentiment and a lack of meaningful manufacturing recovery in multiple areas. Longer-term, the supply...
Previewing 1H24 - 7 Aug We forecast USD 6.9bn for 1H24 adjusted EBITDA vs current Visible Alpha consensus of USD 7.5bn which we expect will decline ahead of reporting next week given detailed reporting from the 2Q24 production report with realised pricing, unit costs and production/sales volumes. GLEN flagged a ''material'' WC release to be reported in 1H24 results but that is a line item notoriously difficult to forecast. Our net debt 1H24 of USD 2.1bn assumes USD1.3bn of WC of release but admittedly there could be significant volatility around that release when results are reported. Please see Figure 1 overleaf for a more detailed variance table. Coal decision quicker than expected We expect GLEN next week will announce it is no longer spinning out coal and we believe that to be the consensus amongst the buyside. Naturally that leads into the question of whether a buyback could be announced as the working assumption has been that the net debt limit goes back to USD10bn (from USD 5bn current) if coal is no longer spun. Taking our net debt forecast of USD 2.1bn and adding what will be provisioned for 2H24 (under their typical framework) is cash for EVR acquisition (USD 7.1bn) and 2nd tranche of the FY23 USD 1.6bn distribution (USD 0.8bn). That leaves our estimate of ''proforma net debt'' right at the conceptually increased net debt target and would imply no top up returns. Two potential scenarios where we could be wrong - a greater than forecast WC release or a net debt cap above USD 10bn under the rationale of the business being larger and able to handle more net debt through-cycle. We would place a relatively higher probability on the former of those scenarios occurring, as opposed to the latter. Estimate revisions We trim 2024-2026 adjusted EBITDA forecasts by -2% to -4% following the 2Q24 production report. The adjustments were all made in Industrial (broadly spread) and we make no changes to our Marketing division assumptions. Thus, we trim our TP...
2Q24 production miss but guidance maintained. Copper/Zinc unit cost up Generally, a weaker 2Q24 print with misses vs cons seen in copper (-7%), zinc (-4%) and total coal (-13%). However, productions are expected to catch up in H2: African copper will recover +c30kt from H1 mill outage and by accessing higher grade ore and higher throughput at Mutanda. Kazzinc is expected to ramp up +c60kt in H2 at Zhairem. The expected H2/H1 uplift in coal production will be mainly driven by its Australian assets, reflecting longwall changes, improved equipment availability, and reduced strip ratios. Meanwhile, 2Q24 production in nickel came in line. KNS''s operating losses to be reported in Adjusted EBITDA in 1H24 are expected to be cUSD100m, including in relation to its transition to care and maintenance in 1Q24. Cobalt beat by +3%, while ferrochrome was +7% ahead of consensus. 2024 production guidance has been maintained across the portfolio except for recently acquired EVR operations, whose coking coal production guidance was increased from 6mt to 12mt (100% basis) due to early closure of the deal. Copper full-year unit cost guidance of USc150/lb was revised up to USc163/lb, including to reflect the impact of lower TCs on metallurgical asset credits and lower cobalt volumes and price realisations. Zinc full-year unit cost guidance of USc5/lb was revised up to USc18.6/lb, including to reflect the impact of lower TCs on metallurgical asset credits. Net debt to decline on meaningful working cap reduction GLEN expects a ''meaningful'' reduction in 1H24 working capital (VA cons. USD 379m), contributing to a h/h decline in net debt. Decision on potential coal demerger to be announced next week A decision on the potential coal demerger is now expected to be announced alongside interim financial results next week. This is earlier than we had expected and conversations with the buyside for some time have expected GLEN to not spin out the business. Glencore will release...
With the views of portions of the investor base moving quickly, we revisit the planned coal spin out and potential value creation opportunity, weighing arguments for and against the transaction. Coal spin-out still unlocks value, we think Based on 2026 estimates (when the spin would be likely to occur) and peer multiples, we estimate that the spin plus the improved multiple on the ex-coal business would create USD6.3bn of equity value. If we run a copper upside scenario (USD11,000/t), and hold other commodity price assumptions unchanged, that value increases to USD10.4bn. What is more difficult to quantify is the number of investors (and AUM) that will be able to invest in Glencore shares that currently cannot due to coal exposure. That opportunity is not a small one either as GLEN scores towards the bottom of ownership ranking amongst 500 ESG funds tracked by our ESG team, representing approximately USD420bn of AUM. Why the change of heart for some Particularly amongst the hedge fund crowd, there has been a rather quick change of opinion, now believing that GLEN should not or will not spin out the coal business. The view is that abandoning the planned spin out would allow the Net Debt cap to return to USD10bn (currently USD5bn), increase shareholder returns and retain the strong cash generation for the combined coal business. Contrary to the open letter penned by Tribeca Investment Partners, we see little investor focus on a move in the primary listing from London to Sydney. EVR transaction on track Teck''s acquisition of a 77% interest in Elk Valley Resources (EVR) is the first step in the eventual planned coal divestment - getting bigger before getting smaller. The deal, which has not been subject to political (Canadian) opposition since its initial approach for the entirety of Teck Resources, remains on track, subject to required approvals, for 3Q24.
A bad combination of an EBITDA miss, consensus expectations which were too high on shareholder returns and production downgrades (vs consensus) on 2025/2026. A presentation will be held at 10am UK time to discuss the results. PandL miss GLEN reported 2H23 adjusted EBITDA of USD7.7bn, -5% vs consensus. At the divisional level, the miss was across the board aside from coal and oil. Marketing EBIT was slightly below expectations (-5%) and recent guidance. The 2024 USD0.13/sh shareholder return, based on 2023 cash flows, is ahead of our expectation of USD0.11/sh but well below consensus showing at USD0.18/sh. 2024 Marketing adjusted EBIT guidance of USD3.0bn is -13% vs consensus of USD3.5bn. 2025/2026 production guidance weak GLEN provided updated 2025 and 2026 production guidance (2024 already known). There are implied cuts vs consensus in copper (average -5%), nickel (average -15%) and ferrochrome (average -12%) with upgrades for cobalt (average +17%) and zinc (average +11%). We would expect the focus on copper/nickel/ferrochrome to outweigh cobalt/zinc. 2024-2026 capex guidance of USD5.7bn per annum, excluding USD400m over 3 years for Mara and El Pachon feasibility studies, is in-line for 2024 but +2% and +10% above consensus for 2025 and 2026. Cash costs across its main commodities will be coming down y/y in 2024 but there is no particularly robust cons for this. Outlook commentary Rate cuts and restocking along the supply chain are expected to bring an improvement in western market demand later in 2024. Glencore expects a strong recovery in demand, particularly copper, from the cyclical trough as supply constraints and energy transition demand has prevented large inventory increases.
We have adjusted our estimates. We do not consider the changes to be material; our rating is unchanged. Ahead of 2H23 results on 21 February, we make adjustments at the divisional level for some of our operating forecasts. We forecast 2H23 EBITDA of USD 8.1bn vs current Visible Alpha consensus of USD 7.7bn. Net debt at YE23 is forecast at USD 4.7bn (excluding 25bn of RMIs - readily marketable inventories) with a base dividend of USD 0.11/sh with no top up.
4Q23 production and 2024 operational guidance - travel and arrive Glencore''s downgrade to 2024 operational guidance, announced last week, was expected by the market - albeit copper was slightly better than feared. In our marketing ahead of the event, the anticipated downgrade was consistently expressed as a reason to be cautious near-term on Glencore. 4Q23 production delivered beats across copper, cobalt and coal while nickel and ferrochrome lagged Visible Alpha consensus. Copper production of 274kt (+10% q/q) was the point of the year, albeit -5% y/y primarily reflective of the sale of Cobar in June 2023. The decline in copper production from Africa (Katanga and Mutanda) was more than offset by growth from the rest of the portfolio. Unit costs for 2023 were guided to be slightly below prior guidance for thermal coal due to lower royalties but higher in base metals given ongoing inflation, cobalt stockpiling and non-cash inventory adjustments within copper. What we expect from 2H23 results Glencore will report 2H23 financial results on 21 February. We forecast 2H23 adjusted EBITDA of USD7.7bn vs company-compiled consensus of USD7.8bn and Visible Alpha consensus of USD8.2bn. Net debt is forecast at USD5.1bn with a base dividend of USD0.10/sh with no top up. Ahead of the expected closure of the Teck coal acquisition in 3Q24 (USD6.9bn for 77% effective interest), we expect Glencore will hold back on any top-up shareholder returns. Estimate revisions result in new TP of 535p We have integrated 4Q23 production results and costs commentary, updated 2023 marketing guidance and 2024 operational guidance, and revised our thermal coal price assumptions. We now forecast a 2024 thermal coal price of USD110/t vs USD133/t prior and spot of USD120/t, given ongoing gas weakness. The result is a -6% cut to 2023e and -8% cut to 2024e adjusted EBITDA forecasts. The earnings downgrades feed into our new TP of 535p (previously 576p).
Fortnight-long COP28 event, in sunny Dubai, breaks up today. There’s tension, though. The draft agreement for this year’s participants omitted the term ‘phase out’ of fossil fuels. What’s China’s view here – the world’s largest GHG emitter? Quite vague. Lip service? Unlikely, given how quickly its power industry at home is changing…
Finally, Glencore has managed to acquire Teck Resources’ met coal assets. This means that half of its initial Teck ambition has been accomplished. While there are some questions with respect to the way forward and its associated timelines, the markets seem to be on board with the firm’s plans. Overall, our positive stock recommendation is reiterated, underpinned by the intact long-term re-rating prospects for a potentially strong non-fossil/metals asset portfolio.
According to the WSJ, Glencore is close to acquiring Teck Resources’ met coal assets. While there has been no official confirmation as yet, this could be a good move if it also culminates in the acquisition of Teck’s non-fossil assets. This is possibly a reflection of Teck’s limited options at present and Glencore finally gaining the upper hand. Overall, Glencore’s attractiveness as our preferred diversified miner is reiterated.
You just got back from a summer holiday + haven’t had time to figure out the latest Commodity World dramas + need some cutting-edge intel from across the key trades? This redEYE is for you. Features copper + aluminium + nickel + lithium + steel + iron ore + coals + gas + uranium…
GLEN TGA YCA BHP ANTO RIO
H1 numbers underwhelming. H2 meant to be easier on volumes and costs A combination of better volumes in H2 and moderating costs should help move unit costs lower. Reversing adverse volumes should account for a USD1.3bn positive, after Glencore missed (somewhat optimistic) consensus EBITDA expectations by 14% in H1 mainly in base metals, Nickel and Zinc in particular. Discount on nickel/zinc realised prices have been particularly large. Higher grades at Collahuasi should help copper in H2; Zinc shipments got disrupted by floods in Australia earlier in the year. Marketing EBIT at USD1.77bn in H1 (a 9% miss to consensus) implies at least USD1.4bn in H2 to reach at least USD3.2bn expected to be exceeded again this year. We have de-risked our thermal coal and Zinc prices assumptions; this together with other adjustments took our group EBITDA 10% lower for the year while our marketing number remained unchanged. We are not assuming more working capital unwind in H2 after the USD2.2bn released in H1. Glencore''s USD2.2bn top up in its capital return makes it a leading 14.1% yield (buy-back included). Teck Coal a potential fast track towards coal separation We remain of the view that Glencore is likely to be the only one able to bid on 100% of EVR, while the media indicates interest from Asian steel groups for 20-40% stakes in the coking coal assets. Assuming a similar bid as the initial USD8.2bn, the net cash outflow would be reduced to USD6.5bn after Teck Coal''s FCF generation. If successful, the positive would be the path to coal separation that Glencore feels unwilling to pursue if its thermal/coking is not reinforced by Teck''s coking coal. Valuation largely unchanged at GBp557 thanks to the lower share count and discount rate If not successful with Teck Coal, Glencore would be able to reward shareholders with another minimum 10.5% yield in FY24e on our conservative numbers. If successful, our SOP indicates a minimum 25% valuation gap through a...
Right now, the environmentalists are angry with China. In recent weeks, they’ve published lots of articles expressing frustrations with China’s resurgent coal imports + record-high carbon emissions + on-going investment in coal-fired power-gen capacity growth. Also, they’re convinced that China will fail to achieve its big carbon goals (2030’s ‘peak emissions’; 2060’s ‘net-zero’). But a review of China’s latest industry data reveals that it’s just having a bad year, battling exogenous shocks. Despite this, China’s coal dependency is still being cut + its 2030 emissions target is still do-able. Time for some chart-based myth-busting…
On the back of a quick reversal of the 2022 market (pricing) excesses – especially for fossils – Glencore reported weak H1 23 results. The profitability miss was sizeable vs. the street expectations. Fortunately, despite all the challenges, Marketing remained on track to exceed the management’s long-term divisional profitability guidance. Even in Industrial, the firm’s beefed-up unique green metals proposition and plans to finally get rid of thermal coal are critical factors supporting the investment case. Overall, Glencore remains a compelling diversified mining bet.
Although there has been no progress on the proposed deal with Teck, markets/investors are hopeful that Glencore could soon fulfill the much-needed call to ditch the coal business. Besides strategic clarity on coal being a critical re-rating catalyst, the firm’s growing dominance/presence in key green transition metals/materials, a valuable counter-cyclical trading cushion and a bigger agri trading market footprint reinforce Glencore’s investment case. The Swiss giant remains our top diversified mining bet.
Has a new Cold War begun? Based solely on the evolving commodity supply strategies of major economic powers, we think so. Key players of the last Cold War – the US, EU & Japan – have already identified commodities which they regard as ‘critical’ inputs for stable economic growth. Now, they’re moving to secure the supply chains of these inputs, mainly by activating old trade alliances. Here, we explain the catalyst for policy change + offer one definition for ‘critical’ + flag S/D/price risks for some of those markets that we cover, exposed to this new Cold War...
GLEN ALL RIO
Coal prices are languishing at shoulder season-lows + industry feedback suggests coal inventories across Asia/Europe are high/rising …so why has China just officially terminated its self-imposed ban on Australian coal imports? Is it a charm-offensive, to engage Australia’s still-new federal government? Perhaps. But a review of China’s power industry signals suggests that a fundamental reason to restore this 80Mtpa trade link may also exist…
For over a year now, we’ve flagged 3 x bear factors for Commodity World: 1. US Fed’s inflation-rates; 2. China’s growth challenges; 3. Russia’s war. Happily for our big call, most commodity prices have been capped since mid-January, even sliding a bit over recent days/weeks. Just between us, though – the dominant price drags right now seem to be left-field ones we never saw coming: 1. US govt. debt ceiling drama; 2. on-going bank sector anxieties (SVB, SB, FRB, CS). News flow on these two themes seem to be far more alarming to investors in our sector, than the Fed/China/Russia issues that we keep flagging to them. They think these are old drivers, fading &/or priced-in for now. Here, we list Commodity World’s lists of bear factors vs. some reasonable bull risks. We also illustrate where spot sits vs. sensible benchmarks (history, costs, forecasts)...
‘Dude, you’re forever going on about US Fed rate hikes and exiting speculators, all dragging on your commodity price outlook. Got any numbers to back that view?’ True, we regard the Fed’s rate hike as central to our short-term bear call for Commodity World. Why? Because since early 2022, most changes in Metal/Energy prices can be explained in terms of the Fed’s rate hikes. Prices are more sensitive to these events than to lockdowns in China, Russia’s war or even to big changes in industry/trade fundamentals. Yesterday, the Fed bolted on another 25bps to its year-old inflation-targeting cycle, set to pause at >5%. Its hawkish pitch has made commodity investing more expensive, prompting investors to exit. Here, we use CFTC data to measure the size of the collective cut since 2020 by ‘non-commercial’ participants – the Fed-focused speculators…
In an interesting development, Teck Resources has withdrawn its initial restructuring plan, i.e. ambition to demerge met coal assets. While this a loss of face for Teck’s board and the Keevil family, it is a reflection of Glencore engaging well with the non-family shareholders. And now the odds of the Swiss giant’s offer sailing through (without risk of overpaying) are higher. Overall, Glencore remains our preferred diversified mining bet.
‘...the state will participate in the whole [lithium] production cycle and create a national lithium company to do so’ - Gabriel Boric, President of Chile Last week, Chile’s government surprised the global lithium market by announcing its plan to partly nationalise its local mining industry. While it still needs Congressional approval, the political push alone may be sufficient to undermine the longer-term investment rate in Chile’s lithium supply growth. Why? Investors are likely to divert more lithium-related capital to lower risk lithium targets ex-Chile. Here, we explain details of this industry proposal + provide an update on Chile’s unresolved industry tax proposal + flag supply risk to Chile’s other big industry of copper + price risk to our lithium outlook…
A year ago, Glencore loved cobalt. Why? Well, every mobile/laptop/top-quality EV battery contains cobalt + cobalt is not thermal coal + being the world’s largest cobalt miner, Glencore can lift cobalt’s price simply by shutting one of its DRC mines. A year later, and the love has clearly soured. Is this because cobalt’s price has halved? Nope. Easily fixed, with another mine closure. It’s the co-ordinated cut in cobalt-use by EV World that troubles Glencore. It’s a bad thing, because all sensible cobalt demand forecasts out there are heavily dependent on the underlying EV demand growth story. Also, investors are asking Glencore about the upside of its metal exposure, since it suddenly wants to be a metal-only miner. Here, we review the least-known of its portfolio: cobalt. We also have a suggestion on how Glencore can reverse the damage done to EV-related cobalt demand…
With the ambition to solidify its dominance in key (green) metals and better address shareholder concerns w.r.t coal, Glencore has made an ‘all share’ $23bn offer for Teck Resources. While the latter has rejected the offer, there are expectations the that terms could be sweetened. Although the deal has benefits, we don’t expect Glencore to go over board. This deal – while another validation of (green) metals’ attractiveness – also sets an important precedent of how biggish sector M&A payment terms could be structured.
Robust FY22 operating performance. Strong activity kept working capital high In a 2H 2022 when operating margins have been under pressure, Glencore was the only diversified miner not missing expectations in Copper. Zinc missed in part due to a USD300m non-cash inventory impairment at Kazzinc, delays in the ramp-up of Zhairem flagged in 1H and curtailments at Portovesme on high energy costs. Coal was in line and a record high USD17.9bn EBITDA contribution. The other stellar performance was Marketing which was a 15% EBIT beat to consensus thanks to a 26% beat in Energy. January 2023 was said to have remained strong in Marketing. We have marginally trimmed our EBITDA 2023 forecast by 2% on lower Zinc and Coal contributions, while Copper and Nickel improve. Marketing broadly unchanged at USD3.2bn EBIT. Still some room for some top up capital return by summer on our numbers The strong finish in commodity prices in Q4 and strong marketing activity kept working capital requirements high. Non-RMI inventory went up by USD3bn in H2 (comprising legal and other provisions too, increases in net margining requirements) when we had expected a USD2bn release. Nevertheless Glencore ended the year with virtually no debt (USD75m Glencore definition) if one treated all of RMIs as quasi-cash (USD5.5bn under our definition, 0.16x ND/EBITDA). Glencore was the only miner announcing a significant special return of USD2bn (ow USD1.5bn in buy-back) for a total USD7.1bn return when including base dividend (c. 10% yield). On our numbers Glencore should have room by end H1 for another top-up in the course of the year and reach a USD10bn return in total. Valuation small up at GBp723 ps. FCF yield 23e still above 15% with coal below USD200/t Consensus numbers are still adjusting on lower coal prices (we use NEWC at USD199/t). Our FY23 dividend and FCF yields at c.10% and c.16% remain very compelling. Glencore energy/base metals portfolio is well placed to benefit from...
Last week, another GLEN annual earnings report = another record-high. This year, EBITDA’s up by an astounding 60%YoY to $34bn – delivered on the back of 2022’s record-high prices for commodities in which this company is a global mining major: thermal coal + copper + zinc + nickel + cobalt. Hot investor topics? GLEN’s ballooning working capital requirements + plunging coal prices. And for us? Got to be how the CEO glossed over the halving of cobalt’s price in 2022. Here, we focus on the Miner’s thoughts on this tiny, high-value metal market + list 3 x critical factors of our cobalt demand/price outlook…
On the back of energy market excesses, Glencore reported ‘record’ 2022 results, with promising dynamics in both divisions. Hence, an impressive shareholder rewards package was also announced. While energy market excesses are reversing/normalising and costs remain a key challenge in Industrial, the Swiss giant – by virtue of its well-differentiated proposition and underlying advantages vs. peers – remains an attractive (diversified) mining play. In fact, the recent share price weakness should be capitalised on to play the next leg of the re-rating.
This past year, copper’s global mining industry reported a spike in war-/energy-related costs, asset closures, project delays, geo-political constraints – across all key sources of exported metal/concentrates – particularly Chile + Peru + Panama. Popular investor requests right now? Data on size/scale of copper’s industry + state of trade flows + our forecast refined supply/demand/prices. Most are just trying to get some perspective on frequent media/industry reports on mine failures/closures. Here, we focus on mine supply = source of 85% of refined metal, starting with Chile – largest national source of exported copper…
GLEN ANTO RIO AAL
You just got back from holiday this week + stepped straight into reporting season + still haven’t had time to check out what’s happened in Commodity World since Christmas? Well, this redEYE is for you. Covers all the big dramas reported market-wide, and specifically in copper + aluminium + nickel + EVs + iron ore + the two coals…
GLEN TGA RIO AAL ANTO
2023 has just kicked off… and our short-term bullish coal/gas price forecasts have already hit a brick wall. Just a month ago, they all seemed so reasonable, perhaps even with a bit of upside. After all, wintery weather was sweeping across the North: energy-starved Western Europe was hoping it’s expensive coal/gas stockpiling strategy would offset ‘Russia risk’ until at least New Year + US was battling another polar vortex. By Christmas though, things had changed. The oddly warm weather that has troubled Europe in recent winters, widely attributed to climate change, returned. Prices for coal & gas – key inputs for European power generation – collapsed. Here, we answer 9 x popular investor questions on coal/gas…
Glencore’s frustrated. Why? There’s all of this market talk about the need to ‘green’ the global power/auto sectors, but the price of copper – a critical input for such an epic upgrade – continues to meander around the US$8,500/t-level. The mining-Major believes copper’s market will report a vast, ballooning deficit over the next decade – if we’re ever to deliver on the EIA’s forecast power/auto shift that gets us to ‘net-zero’ emissions. Last week, Glencore flagged some big numbers from its modelling of the global copper outlook. Here, we compare them with our numbers + suggest how some of Glencore’s demand growth elements can be mitigated + explain why the miners are not growing supply...
Glencore plc Antofagasta plc
There have been news reports suggesting that Tesla has tried to buy a significant minority stake in Glencore. Given the EV giant’s material green transition metal requirements, such an interest wouldn’t be surprising. Note that the Swiss trader-miner is amongst the world’s leading producers of copper, cobalt and nickel. Also, by virtue of its better-positioning to navigate the brewing macro challenges, Glencore remains our preferred sector bet and, hence, another attempt by Tesla cannot be ruled out.
Lots of big commodity-related statements made in recent weeks – President Xi on China’s outlook + Rio’s CEO on the plight of LME aluminium + Freeport’s CEO on global copper trade + Vale on iron ore price forecasts + Germany’s epic rückwärtssalto on nuclear reactors – all explained here…
GLEN TGA RIO ANTO
Fundamental Research Corp has issued a report entitled “Targeting an Untapped Area with Potential for Large Copper-Silver Deposits - Initiating Coverage” and dated September 16, 2022. The full report is now at www.researchfrc.com.
GLEN 601899 MAX MAX
After a quarter’s worth of rate rises, global markets were hoping for some ‘Jackson Hole policy relief’ from Chairman Powell. Instead, they were read the riot act: the Fed’s hawkish tilt’s to remain intact; curbing inflation is more important than growing the economy; and, he will ‘bring some pain’. Unlike his July FOMC chat, Powell gave no scope for this message to be re-interpreted by the market. It was a reality check. Still, it has taken the market a few days to process it. Only now, are rates edging higher + commodity prices sliding again. Here, we review price performances + flag 3 x short-term price-driving catalysts that matter + hand out our own reality checks (China PMI; aluminium production cuts; nuclear power) + review where we are, for spot vs. benchmarks...
In the last 4 weeks, most metal/rock prices have rallied on the expectation that US inflation would soon come under Fed control, slowing rate hike cycle/QT-ing, etc. This simple story just got complicated. Yesterday, China released some surprisingly weak industry/consumer data + cut rates (bearish). Today, we’re told that one of Europe’s monster zinc smelters will soon close on the region’s ballooning power grief (bullish). So, prices are diverging again. Time for some perspective on this sector’s industry/media noise…
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Right now, mining investors are engaging us on mostly Energy market themes. Yep, they’re still hassling us about the sector’s favourites, copper + iron ore. But even discussion on those two metal/rock trades involves lots of energy chat, particular since the Miners are flagging rising energy costs this reporting season + pre-winter ‘Russia risk’ to energy supply builds. Investors aren’t just seeking equity targets – they’re figuring out new/evolving energy risk to their portfolios. What are we saying? Here are our views on today’s popular energy-related news flow…
Glencore reported exceptional H1 22 results and rewards. Trading, as expected, again turned out to be a valued differentiator amid highly volatile times. While Industrial was, to a great extent, driven by coal market excesses, ‘relative’ resilience in metals was also encouraging. Add on top the recent settlement of regulatory investigations, the firm’s leadership has done very well since Ivan Glasenberg’s departure. Overall, Glencore remains our top sector bet, with lower downside risks vis-a-vis the rest of the sector.
Fundamental Research Corp has issued a report entitled “Developing an “Amazon” for Mining Companies - Initiating Coverage” and dated June 9, 2022. The full report is now at www.researchfrc.com.
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American West Metals (AW1 AU) – Step out drilling intersects new polymetallic mineralised zone 250m away from West Desert Glencore (GLEN LN) – Glencore to pay $1.5bn penalty amid bribery charge Ivanhoe Electric - Robert Friedland to IPO battery metal focused Ivanhoe Electric Pensana (PRE LN) – Completion of design and engineering studies for Angolan mine and UK rare-earths processing facilities. Phoenix Copper* (PXC LN) – Phoenix Copper bolsters its PR and IR team Sunstone Metals (STM AU) – Assay results for El Palmar Cu-Au project
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Long-term energy prices revised, Glencore, UK Real Estate Chartbook, The smart approach to smart beta, Global Oil and Gas - Russia / EU escalations are getting messy
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Commodity priceDECK, Hardly any Invincibles left, Glencore, Thungela, Real Estate - No wash out in April, Land Securities, Alliance Pharma, Keller Group, FRP, Ilika, Market Highlights
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Glencore: there’s something here for everyone. If energy security is of critical importance to you, buy Glencore for its Coal. If you expect de-globalisation to accelerate, its marketing arm can exploit it. For those with decarbonisation strategies, copper/cobalt ticks that box. Besides, with steel-intensive growth in China now abating, it’s time to look beyond the rust-dependent Diversifieds. Glencore’s outperforming shares have more upside, driven by extraordinary capital returns.
Fundamental Research Corp has issued a report entitled “Strengthens Portfolio Through a Major Resource Upgrade” and dated April 12, 2022. The full report is now at www.researchfrc.com.
Glencore plc Hot Chili Limited
2021 ended on a promising note. Besides healthy operating results – driven by both the Industrial and Trading divisions, the shareholders were also rewarded handsomely. While there were some one-off charges, the firm’s new leadership deserves credit for sustaining group-wide transformation momentum. Even though the risk of normalising prices and, hence, margins is a sector-wide concern, Glencore, by virtue of its unique proposition, is well-positioned to withstand these challenges. The firm remains one of our preferred large-cap mining bets.
Liberum’s Mining/Commodity team’s first rockSHOT of 2022, over at the Hoop & Grapes, sees them talking about a US Fed-related driver of the New Year surge in commodity prices + listing new/evolving China-related risks to demand-/trade-growth + marvelling over their surprisingly accurate short-term metal/rock price forecasts.
Atalaya Mining (ATYM LN) – Electrochemical metal extraction process for Proyecto Riotinto Culpeo Minerals* (CPO AU) – Interest in Petacas Copper project increased to 66% Glencore (GLEN LN) – Sale of the Ernest Henry mine KEFI Gold and Copper* (KEFI LN) - Hawiah mineral resource increase Strategic Minerals* (SML LN) – Revised PEPR submission for the Leigh Creek Copper Mine
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There isn’t a pub in London called The Central Banker, so today’s rockSHOT is recorded from The Banker. In it, we discuss Tom’s latest quarterly commodity priceDECK and Ben’s accompanying note spelling out the equity conclusions.
We have revised our commodity price deck (see here), and our estimates across our equity coverage. We are approaching fair value for iron ore’s Big Caps, but still believe it is too early to upgrade. Sector still faces a further 35% reduction in EBITDA, spot vs. our 2022 forecasts. Glencore is still our top pick of the Majors. Upside for Anglo American exists, once iron ore/met-coal price weakness passes. Our SMID-cap top picks this quarter are Thungela, Gem Diamonds and Gemfields.
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In this week’s edition of Liberum's Podcast - Best Idea of the Week, Ed Blair talks to Tom Price, Liberum’s Head of Commodities Strategy, about the state-of-play in the Commodity World. Tom explains that as post-lockdown stimulus fades, commodity prices are now increasingly driven by industry-specific fundamentals.
Glencore reported strong H1 results – with both Industrial and Trading clocking healthy performances. More importantly, this momentum is here to stay – thanks to favourable fundamentals for (green transition) metals, the focus on ‘opportunistically’ tackling coal assets and high chances of commodity markets turning volatile. While shareholders have been rewarded extraordinarily, fortunately, Glencore avoided going over the board and prioritised balance sheet flexibility. Moreover, with the new leadership in charge, the firm seems well set to leverage its unique market positioning.
Europa Metals Limited (EUZ LN) – Appointment of PFS manager for the Toral zinc, lead, silver project in Spain Glencore (GLEN LN) - to restart Mutanda mine towards end of 2021 Kavango Resources (KAV LN) – Ben Turney appointed CEO Talga Group* (TLG AU) – Talga signs deal with FREYR for battery anode materials
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Glencore (GLEN LN ) - Glencore maintains production guidance as it works within the constraints of Covid19 measures Power Metal Resources* (POW LN) – Two licenses granted at RRAL JV Scotgold Resources* (SGZ LN) – FY21 interims and a £2m director loan
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There is no energy transition without Copper, Nickel, Cobalt or Vanadium. Given its leadership positions in each, Glencore is uniquely positioned - yet it trades on a 30% discount to peers. We suggest the conditions look right for the incoming CEO Gary Nagle to consider spinning off carbon-heavy stakes to unlock value. We reiterate Outperform. New CEO, pragmatic decisions a la Glencore: but what about the next transformative step? Management surprised the market with its Coal cap announcement in 2018, and again with its decision in December 2020 to reduce its emissions footprint by 40% by 2035. Tail assets are being exited and will rationalise the asset base for good: Mopani, Prodeco, smaller Zinc assets. Oil production in Chad is non-significant and could also face the chop. We would suggest Glencore''s incoming CEO Gary Nagle could consider monetising non-core listed stakes, re-allocating capital to Copper/Cobalt and finding ways to engage with the DoJ on the 2018 subpoena. But for us, the key trade that would unlock huge value is separating out the fossil fuel activities into a Coal-Co. The case to revisit a Coal / fossil fuel separation earlier. Cerrejon a catalyst? Glencore''s pledge to reduce its GHG and therefore Coal footprint by 40% by 2035 is a very significant and a more demanding task than spinning the fossil fuel exposure away, but if the equity valuation is not rewarded, why bother? When we first suggested a Coal separation in March 2019, Coal was 30% of Group EBITDA. It is now 9%: thus more manageable to demerge perhaps? Investment case. Our TP rises to GBp430 (from GBp425) on our updated SOTP The group''s portfolio is well placed to benefit from price sensitive growth as mid-cycle-like demand accelerates further and the marketing department continues to take advantage of tight market conditions in base metals and energy transition metals. Organic growth projects are being restarted: Zhairem at Kazzinc, Raglan Phase II in...
2020 ended on a strong note. While trading remained solid, meaningful improvements materialised in metal industrial. Moreover, with ‘reported’ net debt falling within management’s targeted range, the dividend was reinstated. As performance improvement measures are expected to continue, and the much-needed re-calibration of coal strategy is underway, Glencore now stands a better chance to leverage its ‘green’ proposition, i.e. copper, cobalt and nickel mining dominance. This also lays out an apt platform for the new CEO, who takes charge in 2021.
Glencore has underperformed the FTSE 350 Mining Index significantly after a tough couple of years (-60% vs. index since Jan. 2018) but is now positioned to recoup those losses given its leverage to base metals. The company’s strategy of managed decline in coal is well aligned with the push for global decarbonisation and makes far more sense than its iron ore exposed peers. If that fails to appease investors, it has the option to restructure its coal business and remove the discount on the company. Maintain BUY.
Finally, the details around Ivan Glasenberg’s exit and his replacement have been announced. However, he again brought to the fore Glencore’s adaptability to rapidly-evolving global environmental dynamics, and plans to re-instate shareholder rewards – starting 2021. While the reward bit is contingent on the fulfilment of deleveraging targets, it seems that the worst is behind and Glencore is now focused on capitalising dominance in clean energy-driven metals. Hence, the stock remains our preferred diversified miner, with the added advantage of trading.
Although acute market volatility translated into an H1 bonanza for trading, Glencore’s COVID-19 vulnerability came to the fore as industrial reported losses, and sizeable impairments were recognised. Moreover, the 2020 dividends were suspended to expedite deleveraging. As market uncertainties are expected to persist, trading’s performance cushion should be maintained, and provide valuable time for industrial to revert to normalcy. Remember, as most commodity prices have recovered back to / beyond pre-COVID-19 levels, and production restrictions are easing, industrial should witness gradual improvements.
Swedish Stirling is building momentum with the signing of a new agreement with Glencore for an additional 88 PWR BLOK waste gas to energy units. This deal is with South Africa’s largest ferro chrome smelter and shows that the company’s technology is gaining acceptance as a go to solution in the industry in South Africa. Swedish Stirling has benefited from its in-country team which has meant that COVID 19 restrictions has not prevented progress. The company now has a strong pipeline of deals which should drive sales in future years.
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Glencore (GLEN LN) –- H1 report describes a strong half-year particularly from its marketing business | Highland Gold (HGM LN) – Recommended pre-conditional mandatory cash offer at 300p by Fortiana | Keras Resources* (KRS LN) (diluted) – Keras acquires 51% in near-production organic rock phosphate project in the US | Metal Tiger (MTR LN) – Drilling results from the A4 Dome in Botswana | Pensana Rare Earths (PRE LN) – Quarterly report and project update | Taseko Mines Limited (TKO LN) - North American copper producer to release Q2 results
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ADRIATIC METALS^ (ADT1, NR, CNP) – Largest shareholder Sandfire goes to court claiming breach of anti-dilution right | GLENCORE^ (GLEN, NR, CNP) – H1’20 production generally poor; Marketing guidance tweaked up to “top end” of target range | PETROPAVLOVSK^ (POG, NR, CNP) – IRC: encouraging Q2’20 update; we expect markedly improved financials in 2020, COVID-19 and iron ore prices willing | SALT LAKE POTASH^ (SO4, NR, CNP) – Long-awaited Taurus project development facility now “imminent” | TASEKO MINES^ (TKO, NR, CNP) – Q2’20 financials to come out after market close on Wed 5th August
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Copper prices have now bounced 28% from the lows in March, and most of the near term indicators suggest that the market in China continues to be tight. Eventually the market will loosen as both mine and scrap supply recovers, and the credit impulse in China peaks, but for now, we remain optimistic on the price outlook and remain long the copper equities. We had been concerned that valuations were looking very full, but after recent moves, Antofagasta is “cheap” once again on spot prices, and is trading at the bottom of its normal multiple range. Our preferred copper play remains Taseko Mines (see here) trading at 0.3x on our sum of the parts valuation.
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The commodity demand indicators in China, namely real estate activity and infrastructure investment, are slowly catching up with China’s industrial output and moved back into growth territory in May. With broad based borrowing growth from each sector of the economy, those demand indicators are likely to grow from here. Whilst steel consumption is at record highs, demand for seaborne iron ore demand is softening, albeit from record levels, as domestic mine supply and scrap recovers. We believe that Glencore (BUY, TP £2.10) remains the better play on the recovery.
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With the scale of the downgrades to economic growth, in particular what happened to China in the first quarter, to still have the copper price average $2.48/lb year to date is remarkable. If we look back on the 2008 financial crisis copper got to a low of $1.29/lb and thus far the lowest print has been $2.10/lb on March 23rd.
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Our Restocking Indicator has remained on a hold signal for the second month following a sell signal in February. We are expecting weakness in global end use demand to eventually drive a destock, coupled with recovering seaborne and domestic mine supply to take the iron ore prices and equities lower.
The current downturn could easily be more protracted and severe than the previous two, but at least this time round, the companies are far less leveraged on the whole. We investigate the liquidity and balance sheet strength of our coverage under two commodity price scenarios.
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GLENCORE^ (GLEN, NR, CNP) – “Facts that may be relevant” to bribery and corruptions probes uncovered, shared with authorities | GEM DIAMONDS^ (GEMD, NR, CNP) – Nice large-stone haul in the last few days, includes a 114ct diamond
Glencore plc Gem Diamonds Limited
Our Restocking Indicator has moved to a Sell signal following its weakest ever reading. This has not come as a huge surprise given the difficulties that China's factories are having in getting back on line because of the coronavirus, but there are a few trends that will endanger the recovery,
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Historical share price action has told us time and again to buy the dip on demand shocks and uncertainty, as neither will last. For the most of part, we agree with this sentiment and believe that the mining sector looks attractive at these prices, given the oncoming stimulus in China and that the equities have recently de-rated on spot commodity prices and FX. However the two key issues for us are 1) calling the bottom, which we will undoubtedly fail to do, and 2) whether the coronavirus will accelerate bearish secular trends in Chinese real estate and global trade.
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Glencore witnessed a tough 2019, with trading (yet again) being the sole support. While weakness in metal industrial was largely due to prices – which should normalise sooner or later, the issue with energy industrial (primarily coal) is more structural in nature. Although 2020 operationally may not be ‘materially’ better vs. 2019 – also due to Coronavirus uncertainties, the expected change in leadership and, hence, new strategic measures could facilitate the much-awaited stock re-rating.
Glencore (GLEN LN) – Glencore report 2019 loss as marketing department serves to rescue customers as Wuhan virus disrupts commodity supply chains. | Medusa Mining (MML AU) – Co-O L8 Shaft operations restarted | Pan African Resources (PAF LN) – Positive interim result on strong production and gold prices | Sirius Minerals (SXX LN) – Private investor opposition | Tertiary Minerals* (TYM LN) – Pyramid Gold project Nevada
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Glencore has maintained caution with respect to near-term business plans as the trader-miner braces itself for the appointment of a new (and young) management team. While the group is simultaneously working hard to beef up its green credentials, a series of regulatory investigations (including the recent SFO probe) and sustained macro headwinds could continue to dampen near-term sentiment.
Glencore (GLEN LN) – Serious Fraud Office investigation starts in addition to US DoJ enquiry | Kodal Minerals* (KOD LN) – Interim results and Bougouni progress report | Metal Tiger (MTR LN) 1.2p, Mkt Cap £18m – Okavango copper project drilling
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Our Restocking Indicator is back on a Buy signal for the first time since June and follows a positive inflection in other leading indicators (Download Mining - Mixed messages from China data). In the short term we have lost our conviction on a bearish sector call and would not be outright short.
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The Chinese data this month has thrown up more questions than answers for the direction of travel for commodities over the next few months. Whilst the consumption data for key building materials is clearly slowing, as we expected, there has now been an improvement in the leading indicators of credit and real estate.
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The start of 2019 showed all the early signs of another credit driven demand upcycle for commodities. China pumped RMB4.6 trillion of new lending into the system in January, housing construction began to tick up and fiscal expenditure plans were brought forward. However, nine months later this mini-cycle looks noticeably different than the previous three.
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Glencore’s fragile results were a combination of difficult market conditions and various internal issues. Profitability slumped to levels unseen for the past few years, with the headwinds in industrial being far more severe than trading. While a number of restructuring initiatives are expected in the coming months, any immediate turnaround seems difficult. Hence, investors looking to reap the benefits of Glencore’s dominance in EV-related materials and commodities trading need to be patient and strong nerved.
Key price supports for thermal coal removed
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Armadale Capital (ACP LN) – Mahenge Liandu graphite project DFS update | Glencore (GLEN LN) – Commodities Futures Trading Commission investigation | Ferrexpo (FXPO LN) – Deloitte resigns as auditor | Lonmin (LMI LN) – Sibanye-Stillwater increases all share offer to 1:1 | Lucara Diamonds (LUC CN) – 1758 carat diamond recovered at Karowe
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2018 results largely benefited from extraordinary coal earnings – which were driven by a combination of (unsustainable) price tailwinds and impressive unit cost control. However, there were various issues in copper, zinc and trading (collectively c.70% of gross asset value) – thereby warranting remedial measures. While the remedies may take some time to come into effect, management seems to have bought time via the announcement of attractive shareholder rewards.
China has started off the year with a bang with the largest ever monthly print for new aggregate financing to the broad economy of RMB4,640bn vs survey expectations of RMB3,307bn. Chinese credit is always front end loaded in the year and we knew that the Chinese Government had brought forward local government bond issuance, but even so this is well above expectations.
Weakness in key parts of the Chinese real estate have arrested despite the continuing limitations put on the space from the tightness in credit and deteriorating house price expectations. We do not view this as a potential inflection and expect renewed weakness in floor space sales and new starts to continue in the months to follow, which will ultimately cause weakness in the consumption of key commodities of iron ore and copper.
The rollover in the all-important Chinese housing sector has continued this month on virtually every metric. We are now seeing the floor space sales weaken at a pace of -4.0% (3MMA Y/Y), which is the slowest pace in over three and a half years. New starts growth is still elevated after dislocating from sales at the beginning of the year, but that growth is now falling. The construction investment that would normally follow has yet to materialise and we suspect will not for some time as developers' funds run out. There was one bright spot in the data release overnight with the continuing recovery in infrastructure, but we do not believe this investment will be sufficient to offset the commodity demand weakness from the fall in credit (Download Mining - China credit slowdown continues) and real estate. We maintain our bearish sector call in both the short and medium term.
Almost a week after Glencore narrowed its FY2018 trading EBIT guidance, yesterday Trafigura reported somewhat disappointing full-year (September-ending) results. Despite healthy sales of $181bn (+32% yoy), net profit came in at $873m (-1.6%) – the lowest since 2012. While its metals division had a solid year, the energy division – despite 7.5% higher traded volumes – suffered on account of increasing competition and oil market backwardation since October 2017. On a separate note, in early-December 2018, Brazilian prosecutors alleged that Glencore, Trafigura and Vitol over the years have collectively paid over $30m as bribes to employees of Petrobras – the embattled state-owned oil company – to seek business contracts. Even Bunge, the US agri-trading giant – previously on Glencore’s acquisitive radar – has seen its CEO stepping down as operational disappointments have continued. Interestingly, the activist investors (Continental Grain and DE Shaw) have tightened their grip on Bunge’s board and initiated a strategic review of the business – with the possibility of a complete sell-out not being ruled out. Overall, apart from trading conditions becoming somewhat difficult in 2018, the regulatory pressure on traders has been mounting.
For all those expecting China to rely on big bang credit stimulus to help pick up the economy into the end of the year will be disappointed as it appears the Government are taking a far more measured approach. New credit growth in November continues the weakening trend that began in April 2016 and turned negative mid-2017. In particular the new credit being borrowed by corporations has tumbled to -55% Y/Y on a rolling six month basis. This slowdown in credit bodes very poorly for Chinese commodity demand and mining equities in 2019, where typically we do not see a bottom in share prices till at least five months after the inflection in credit
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Unlike last year, when Glencore was oozing with confidence, this year’s Capital Markets Day smacked of restrain. Apart from narrowing the group’s trading profit guidance, a slew of (critical) management changes was announced. The management reshuffle may have been done to ease somewhat the extent of regulatory scrutiny. While the target of aggressive long-term output growth remains, the eventual outcome of the (regulatory) investigations is critical.
The markets have increasingly expected monetary easing in China, given the more accommodative policy changes made by the Government over the past few months, but it has still yet to arrive. Allsystem aggregate financing of RMB728bn missed survey estimates of RMB1,300bn by a wide margin and also means that credit growth on both a rolling six and twelve months basis has yet to trough. We recently published a report (see Download Mining - Analysing cyclical turning points (18 pgs)) examining the relationship between the past three credit cycles and the mining sector which highlighted even under the most aggressive stimulus scenario (2008) there was a five month gap between the trough in credit and the mining sector trough. Given the structural headwinds to a similar stimulus this time, we expect demand to slow further over the next six months.
As the Chinese business cycle turns, damage to apparent demand from weakening consumption can be heavily aggravated by destocking of inventory down the value chain. However, the risk of a material destocking this downcycle seems low, based on our analysis of downstream inventory levels in the key commodities of iron ore, copper and coal. Having lower levels of inventory means commodity prices should be less likely to overshoot on the downside and should soften the cycle, but we would caution against interpreting them as a bullish signal, as they mostly appear to be structural.
The end-of-cycle thematic seen in other sectors is filtering through the mining space where valuations look increasingly cheap despite positive earnings momentum. We believe it is the end of the cycle and commodities have further to fall in 2019 as Chinese housing rolls over (Download Mining: Chinese real estate dislocation continues). A violent down-cycle is not our base case as balance sheets are in a better place, and so the downside is limited to c.20-30%, but we still think consensus long-run pricing in iron ore in particular is too high. The old adage is to sell cyclicals when they are cheap and buy them when they are expensive. In this instance, the mining stocks have rarely been cheaper.
As various key consumption indicators rollover (vehicle sales in September down 11.6% Y/Y) and anecdotal evidence builds that all is not well with the Chinese real estate, the market has been waiting for a wave of easy money to ease the country's economic slowdown and weakening consumer confidence. The September Chinese credit data didn't deliver a material acceleration in credit growth despite some easing of monetary transmission mechanisms, although it appears to have troughed on a 6mma YoY basis. Our recent bullishness on the short term has turned over the past couple of weeks, and we await the real estate data due out on Friday to confirm the weakness in floor space sales and near term commodity demand.
The Chinese property upswing in floor space newly started and prices is still very much in motion, but it continues to miss some vital fundamental drivers for it to be sustainable, namely sales growth and excess liquidity. Either these drivers are unusually lagged and just around the corner, or this new cycle will run out of fuel fairly quickly and developers will be stuck with excess inventory again. Short term it is difficult to be bearish on demand of bulk materials because of the current momentum, hence why we have softened our negative stance with upgrades of Glencore and Rio Tinto to Hold. However we could be in a very different position by the end of the year if the Chinese government have not pushed on the monetary stimulus accelerator pedal.
In the past few months we have seen the tone of Chinese Government comments around monetary policy change to be more accomodative, in the face of the economic headwinds of the trade war with the United States. Until now credit had continued to tighten in China, driven by the contraction in shadow financing, but this month release shows an inflection in the trend. It's too soon to say if it is the beginning of a trend and it will largely depend on the escalation or deescalation of the trade war with the U.S. For the next six to twelve months, the currently negative credit growth is still headwind for domestic commodity demand, but we will reevaluate our bearish sector view if credit growth moves back into positive territory.
Galantas Gold (GAL LN) – Private placement for £1.26m | Glencore (GLEN LN) – Sale of interest in Rosneft | Strategic Minerals* (SML LN) – Focusing on mineral diversity in stable jurisdictions | Thor Mining (THR LN) – Pilot Mountain scoping study
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In the last couple of months we have seen the market repricing the risk of Glencore with the share price down 24%. Whilst sentiment could deteriorate further on trade war escalation and investigation developments, it is divorced from the reality of strong commodity demand fundamentals in China. We do expect demand to eventually roll over, but this is highly unlikely in the short term with the recent upswing in Chinese real estate. There are a lack of near term catalysts for us to be buyers, but if copper prices do move below $2.50/lb, chance of supply side response increases and would present a buying opportunity. At a 2019 FCF yield of 11%, even on our bearish price deck, we upgrade to HOLD.
We've seen a number of headlines over the past few months indicating the Chinese Government are pushing for more accommodative monetary policy, with efforts aimed particularly at increasing credit flows to private enterprises that are feeling a liquidity pinch. However, the monthly credit data released today again missed expectations and showed conditions are still tightening overall, further pointing to slowing demand in the second half
H1 results were strong across divisions, largely due to supportive prices. Industrial managed to hit profit levels last seen in 2007, while trading remained robust. However, the recent regulatory/political uncertainties have taken a toll on Glencore’s fortunes. Unless a practical solution is reached on most of these, the way forward should remain patchy. Although, more shareholder rewards to divert the market’s attention cannot be ruled out.
The central reason for a bearish thesis on the mining sector is that the Chinese real estate sector is due to roll over in a big way and would result in structurally lower demand growth for key commodities of steel and copper. We are bearish for a number of structural factors, but the timing also seems to be supported by key Government policy that houses are for living in, not for speculation. This advice has clearly fallen on deaf ears and speculative purchases in Q1'18 instead grew on record levels in 2017 to over half of real estate sales.
Glencore has been subpoenaed by the US Department of Justice (DoJ) to produce documents (from 2007 to the present) related to businesses in Nigeria, the Democratic Republic of Congo and Venezuela – in order to check the group’s compliance with the Foreign Corrupt Practices Act and the United States’ money laundering statutes. As a result, Glencore’s share price fell c.10% on 3 July 2018.
Share price reaction to yesterday's DoJ subpoena was in all likelihood overdone on a standalone fundamental basis. However for investors tiring of news hand grenades in an already volatile sector, the derating in Glencore's multiples are justifiable. Uncertainty over the company's past dealings will persist and we are not expecting a quick mean reversion in multiples. We expect Glencore to signal confidence with a share buyback at the interim results, but there is little else they can do to assuage investors of their innocence or that there are any other future issues forthcoming. We maintain our Sell rating as we expect further weakness in the copper price.
Liberum's Mining Analysts, Richard Knights and Ben Davis, discuss why they remain bearish on the UK Mining sector, with a focus on the key areas of investor pushback to a negative stance, a look at the key commodity calls and what this means for equities.
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There has been increasing talk that China is back on a loosening bias with the recent RRR cut and the small beat in new credit in China last month will likely add to fuel to the fire. New total social finance in April came in at RMB 1560bn vs survey estimates of RMB1350bn and prior month of RMB 1330bn. On a rolling six month average this translates to -16% on last year, albeit a small inflection on the weak print last month. We believe that the tightening bias is still very much in place given the apparent strength of the overall economy and this will translate to slowing commodity demand and investment in the months ahead.
On Friday evening, Glencore made an official release stating that: 1/ Glencore-Qatar Investment Authority’s JV, which bought a 19.5% stake in Rosneft, has terminated the agreement to sell a 14.16% stake to CEFC (a privately-owned Chinese conglomerate); 2/ the JV is being dissolved and now Qatar Investment Authority (QIA) will hold an 18.93% direct stake in Rosneft while Glencore’s stake would be just 0.57%; 3/ consideration attributable to Glencore’s interest in the JV (i.e. 50%) is €3.7bn.
Thermal coal prices have continued to defy consensus and our own expectations with prices now back at around the $100/t mark. However the market still doubts the sustainability of these prices longer term, as evidenced by the cheap multiples of the coal equities (Glencore trading at 15.1% spot FCF yield). Downside has been limited because of domestic Chinese coal policy, but with consumption now falling in China we do not believe that will be the case going forward and expect prices to fall to $75/t over the next six months. Despite the lack of reinvestment in coal mines, we are not optimistic on the longer term picture for seaborne coal, given the vanishing coal power plant build out in India, as highlighted by the Global Coal Plant Tracker.
Glencore plc Anglo American plc
Glencore (GLEN LN) – Q1 production report shows good performance as group faces legal challenges in the DRC | Mkango Resources* (MKA LN) – Drill program underway to update the resource and start Feasibility Study at Songwe Hill in Malawi
Glencore plc Mkango Resources Ltd.
Whilst the mining sector fumbles with what the possible fundamental impact could be from the sanctions on Russia and escalation in a US trade war with China, the best medium-term lead indicator for sector performance, Chinese credit growth, remains in negative territory and continues to slow further, as confirmed by the March prints today. We expect this deceleration to continue, assuming the overall economy does not slow too sharply, as the Government attempts to de-risk the economy's balance sheet.
The risk of punitive US sanctions on Russia has finally become a reality. On 6 April 2018, the Trump administration unveiled sanctions on seven Russian oligarchs and 12 companies they own/control, 17 senior Russian government officials, and a state-owned Russian weapons trading company and its subsidiary, a Russian bank. These measures were announced after taking into consideration the Russian state’s interference in Crimea, Ukraine and Syria, and (alleged) malicious cyber activities. One of the affected oligarchs was Oleg Deripaska – En+’s direct and Rusal’s indirect controlling shareholder. Apart from being considered a close aide of the Russian state (and Vladimir Putin), he is also accused of involvement in a host of illegal activities – as stated in the US Department of the Treasury’s press release. Since the announcement of these sanctions, Rusal has lost 56% of its market value – with the share price reduced to early-2016 (when commodity markets had hit a nadir) levels. The recently-listed En+ has also lost 35% of its market value. Rusal’s initial assessment suggests that it is highly likely that the impact may be materially adverse to the business and prospects of the group. As a reminder, Rusal’s US sales exposure is c.14%. Moreover, the sanctions may result in technical defaults in relation to certain credit obligations, and the company is evaluating the potential impact on its financial position. In another setback, the London Metal Exchange (LME) plans to suspend Rusal’s aluminium from its list of approved brands from 17 April 2018 after some members raised objections in dealing with sanctioned companies.
2017 ended on an excellent note, with Glencore not only achieving record operating profits, but also garnering cash from asset disposals. Gearing fell further with a simultaneous pursual of opportunistic growth avenues and the reinstatement of attractive dividends. Moreover, the performance should remain resilient on the back of a stable expected contribution from trading and industrials’ gains from the EV and supply/cost control stories.
Glencore (GLEN LN) 400p, Mkt Cap £58bn – Trading and marketing drives Glencore earnings | Mkango Resources* (MKA LN) 9.3p, mkt 9.7m - Rare Earth Element prices hike higher | Patagonia Gold (PGD LN) 1.3p, mkt cap £31.3m - Proceeding with Calcatreu option | Pathfinder Minerals plc (PFP LN) £1p, mkt cap £2.4m – Mozambique | Rainbow Rare Earths Ltd (RBW LN) – 13.9p, mkt cap £24.2m – Raising £2.8m for growth plans at Gakara
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Last night's Chinese steel PMI data is a key input in our proprietary Restocking Indicator, which has a 50% weighting in our Short-term quantitative trade signal. Whilst the headline PMI improved marginally from 50.2 to 50.9, there was a significant deterioration in both the book to bill ratio (from 1.14 to 0.97) and the inventory ratio (from 1.05 to 0.84).
The copper price had a good 2017, up 33% and peaking at a multi-year high of $3.31/lb. This price move is clearly anticipating tighter markets ahead as the physical tightness today has yet to be seen given the steady inventories and flat apparent demand growth. The market is focused on global synchronised demand growth outpacing slowing supply additions two years out, but we still believe near term the risks remain to the downside given the bevy of indicators below pointing to weaker demand. Supply disruptions are wildcards as ever, and possibly more so given the better price environment, but China's evolving views on scrap could be far more damaging. Until we have further clarity on domestic Chinese regulation, risks appeared balanced on a 3 month view, but six months out we maintain our bearish stance.
GLEN AAL RIO ANTO KAZ
As mining equities continue to hit new highs the best medium-term lead indicator for sector performance over the past decade and a half, Chinese credit growth, continues to slow as confirmed by the December prints today. Broad credit growth (total social finance + local govt debt issuance) was down in 2017 on 2016 by 0.3%, and we expect this deceleration to continue, assuming the overall economy does not slow too sharply, as the Government attempts to derisk the economy's balance sheet.
GLEN AAL ANTO KAZ
Despite the cuts to steel, aluminium and cement capacity over winter in China, power demand rebounded on gas shortages and kept domestic coal prices elevated far above the targeted levels of the Government and Newcastle coal is now back above $100/t. The seaborne market was additionally tightened by a restock at Indian power plants, where inventories had reached three year lows. Coal prices look well supported for the next three months given low inventories in China. However we still see the same pressures on seaborne import into both China & India as they look to protect local industry and otherwise develop cleaner energy sources to reduce pollution. We are upgrading our thermal coal forecasts to $85/t in H1 (from $65/t), then subsequently dropping to $65/t in H2. We maintain our sell recommendation on Glencore (price target £3)
During an investor update call held last week, Glencore emerged as the first miner (under our coverage) to quantify the (huge?) potential that the electric vehicle (EV) revolution holds for the mining sector. Apart from positioning itself as a direct beneficiary (via its cobalt, copper and nickel exposure) of the EV euphoria, in general the trader-miner also sounded optimistic about the prospects of its diversified portfolio. As a result, aggressive output growth is being targeted through to 2020 – copper (+25%), zinc (+18%), nickel (+23%), cobalt (+133%), coal (+15%) and oil (+39%). Consequently, industrial capex guidance through to 2020 has also been increased by $500m p.a. More (aggressive) growth can be targeted via the reinstatement of idled capacities and bolt-on acquisitions. Although nickel and zinc’s unit costs are expected to increase significantly (average 28%) in 2018, copper and coal’s costs are guided to be flat and +4%, respectively. Reiterating its trading prowess, management finally confirmed it is able to achieve $2.8bn in trading EBIT (after a series of guidance upgrades) during 2017 and mentioned that a similar performance could be attained in 2018 – if current market conditions are sustained. Moreover, the group targets $2.2-3.2bn of long-term trading profits, thereby rendering an ample cash flow cushion through the business cycle. Based on Glencore’s definition of net debt (gross debt less cash and cash equivalents, and readily marketable inventories), it targets through the cycle net debt of $10-16bn and net debt/EBITDA of <2x. Given management’s business optimism, they also hinted towards the possibility of higher dividends during the H1 18 results release.
Bacanora Minerals (BCN LN) – Seeking to set aside 3% royalty | Bushveld Minerals (BMN) BUY – Target price maintained at 11p – Vametco ramps up Nitrovan production as costs rise | Glencore (GLEN LN) –Nominating 3 directors to Katanga Mining | Highland Gold (HGM LN) – Novo JORC reserves and resources statement released | Kodal Minerals* (KOD LN) – Lithium expert appointed as non-executive director | Savannah Resources (SAV LN) – Pilot plant commissioning underway at Mutamba | Shanta Gold (SHG LN) – New Sinigida resource + operations update | Stratex (STI LN) / Crusader (CAS AU) - Crusader appoints Marcus Engelbrecht, formerly at Stratex as ceo
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According to media reports, Mick Davis (ex-CEO of Xstrata, acquired by Glencore in 2013) is speculated to be the top contender for the Chairman’s role at Rio Tinto. Jan du Plessis, Rio’s current Chairman, is leaving the Anglo-Australian miner in 2018 to take up the Chairman’s role at BT Group. Finding his replacement hasn’t been an easy task, with John Varley – Rio’s director entrusted with the responsibility of finding a successor – resigning in June 2017, after he was charged by the UK authorities for alleged wrongdoing(s) during his tenure at Barclays. There is no official confirmation from Rio in this regard.
The JV between Glencore and Qatar Investment Authority (QIA), details in our Latest – “The mysterious Rosneft deal” – dated 31 January 2017, has entered into an agreement with CEFC China Energy Company Limited (a privately-held conglomerate) to sell a 14.16% stake in Rosneft. The deal would be priced at a 16% premium to the 30-day volume-weighted average share price on 8 September 2017. Post completion, Glencore and QIA’s stated ‘economic interest’ in Rosneft (collectively 19.5% earlier) would be 0.5% and 4.7%, respectively, which is now commensurate with their earlier capital commitments (made in January 2017) of €2.8bn.
Glencore (GLEN LN) has announced strong interim earnings reversing a loss of US$369m in H1 2016 to a net profit of US$2.45bn. Full year net profit for 2016 was US$1.38bn. Revenue of US$100bn was up 44% YoY whilst EBITDA of US$6.7bn was 68% YoY. The stronger earnings were primarily driven by the recovery in commodity prices, particularly base metals. Although commodity prices in dollar terms benefitted from the recent depreciation the positive earnings impact was partially offset by the consequent strength of EM currencies where GLEN’s operations are based.
Millennial Lithium (ML CN) | Glencore (GLEN LN) | KAZ Minerals (KAZ LN)
Glencore plc KAZ Minerals PLC
Yesterday, Altyn (ALTN LN) the operator of the Sekisovskoye gold-silver mine in Kazakhstan, announced the appointment of Neil Herbert as Executive Deputy Chair. Neil joined the firm as non-exec in February, 2016 and now steps into an executive role. Neil is known throughout the London market for his participation on boards and managements of numerous successful London listed firms over the years including Polo Resources (POL LN), Galahad Gold, IronRidge Resources (IRR LN), Anglo African Agriculture (AAA LN), Brancote Holdings, and Patagonia Gold (PGD LN).
On 10 December 2016, Glencore announced that it along with the Qatar Investment Authority (QIA) have established a (50:50) consortium for acquiring a 19.5% stake in Rosneft (the Russian oil & gas giant). The total consideration for this deal was €10.2bn – of which Glencore’s equity commitment was a meagre €300m while QIA’s commitment was €2.5bn. The balance was accessed via ‘non-recourse’ bank financing, principally being underwritten by Intesa Sanpaolo (Intesa). Moreover, a ‘new’ five-year agreement was inked between Rosneft and Glencore for providing 0.22m barrels per day of oil for the latter’s trading business. Way back in March 2013, Glencore and Vitol (another major oil trader) had signed a long-term ‘crude and oil products’ supply agreement with Rosneft, ensuring 46.9mt and 20.1mt, respectively, of supply, although the timeframe of delivery not disclosed. Under that agreement, Glencore had extended a $500m trade advance to Rosneft, with the advance being repaid via future oil deliveries starting in March 2015. Besides this (old) business connection, John Mack (former CEO & Chairman at Morgan Stanley), a director on Glencore’s board, had served as a director at Rosneft (during 2013-14). On 3 January 2017, Glencore announced that this transaction has been completed.
Glencore continues to surprise the markets, earlier with its fast pace of asset disposals and now with the reinstatement of dividends. The following were the key details shared with investors in a meeting held on 1 December 2016: 1/ completed $6.3bn of asset disposals; 2/ reduced net debt (including readily marketable inventories) by $12.5bn over the last 18 months; 3/ reiterated trading’s 2016 EBIT guidance towards the upper end of the $2.5-2.7bn range; 4/ expects healthy annualised 2016 free cash flows – even at Q1 16 commodity price lows; at 2017 forward prices, FCFs are guided to be $6.5bn; 5/ dividends would be reinstated from 2017 – with $1bn to be paid in two equal tranches in H1 and H2; thereafter (i.e. 2018 onwards), $1bn would be a fixed annual dividend payment (banking on the stability of trading’s cash flows) plus a minimum 25% of FCFs from industrial activities. Production guided to grow Source – Investor Presentation December 2016 While copper would be negatively impacted by the end-of-life impact at Alumbera and the Ernest Henry divestment, the output for all other commodities is guided to be higher (in varying degrees).
BlueRock Diamonds | Glencore | Golden Star Resources | Highland Gold | Kodal Minerals | Sirius Minerals
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Even though Glencore’s H1 16 results came materially behind consensus estimates, we were not very surprised as our estimates were on the cautious side. Continuation of the group’s deleveraging plan was again the key highlight. H1 sales came in at $69.4bn (-19% yoy), with weakness in metals and energy industrials being most pronounced. But, if the impact of divestments/discontinued operations was excluded, sales were down only 6% yoy. Adjusted EBIT (excluding income from associates and JVs) came in at $539m – translating into a wafer-thin operating margin of 0.8%, similar to the levels achieved in H2 15 (which were before any divestments/discontinued operations). Marketing (aka trading) continued to be Glencore’s sole shining spot, with an adjusted EBIT of $1.1bn. While industrial (primarily energy) was an operational drag – generating an operating loss of $315m. Besides the operating weakness and despite material deleveraging, H1 interest expenses came in 18% higher at $862m – primarily due to higher interest capitalisation in the comparable period. Net losses shrunk to $615m vs. $4.3bn and $817m in H2 15 and H1 15, respectively. While the pace of working capital efficiencies lost steam (release of $1.7bn vs. $4.7bn in H1 15), which along with weak operations resulted in reported OCFs collapsing 47% to $4bn, conservative capex (down 48% to $1.4bn) ensured that FCFs remained healthy. Net debt (excluding marketable inventories) was reduced further to $35.7bn vs. $41.3bn at 2015-end.
This Morning’s News Goldplat (GDP LN)# Glencore (GLEN LN)
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Glencore (GLEN LN) has announced production numbers for H1 2016 which were largely in line with expectations. Production across key commodities was down following curtailments in copper, zinc, coal and oil. Copper production of 703kt was down 4% YoY due to the shutdowns in Zambia while zinc production was 31% lower YoY to 507kt following cuts in Peru and Australia. Coal production of 59mt was down 14% YoY largely due to reductions in South African thermal coal output. Oil production was also curtailed by 17% YoY to 12.7mmbbl.
Glencore’s FY2015 results again reiterate the fact that its Xstrata acquisition in 2013 was a big strategic mistake. While the group had been in a denial mode until mid-2015, a slew of measures implemented since then (facilitating massive deleveraging) have helped revive the trader-cum-miner’s long-term sustainability prospects. *Trading top-line as badly hit as mining…* Sales: H2 15 – $85bn (-21% yoy, -1% hoh); 2015 – $170bn (-23%; 0.5% ahead of AV estimates) Both the trading (marketing) and mining (industrial) divisions' full-year sales were down 23% and 21%, respectively. While trading's top-line sagged under the pressure of weaker oil prices (down 46%), despite robust trading volumes (especially in crude oil, +26% in 2015), mining was impacted by a combination of weaker prices (nickel, coal, copper and zinc down 30%, 20%, 20% and 11%, respectively) and output rationalisation. *…but trading profitability helped avert a total collapse* Adjusted EBIT: H2 15 – $650m (-75% yoy; -43% hoh); 2015 – $1.8bn (-68%; 36% behind AV estimates) While other miners managed to be profitable at an operating level (even though materially below the historical levels), Glencore’s mining performance slumped to record lows with an operating loss of $552m in H2 15 (vs. a profit of $1.6bn in H2 14) and a $185m loss in 2015 (vs. a profit of $3.4bn in 2014). Even $643m of cost savings and $2.1bn of forex gains failed to render any meaningful support. The “only” soothing factor amid this chaos was a somewhat resilient trading division which reported an operating profit of $1.4bn (+5%) and $2.5bn (-14%) in H2 and 2015, respectively. Although benefits from a recovery in metals trading (in H2) and effective capitalisation of the oil market volatility (in 2015) were (partly) offset by unfavourable comps in agriculture. Full-year asset impairments stood at $7.1bn, o/w $4bn was attributable to the newly-commissioned (and still ramping-up) Koniambo nickel asset (acquired from Xstrata, 81% of its value already written-off). Net attributable loss came in at $4.3bn in H2 15 and $5bn in 2015 (vs. a profit of $2.3bn in 2014). *Massive working capital release allays (near term) liquidity concerns* A $6.6bn working capital release (including $3.9bn from marketable inventories) and $900m proceeds from the Antamina silver-streaming transaction resulted in reported OCFs galloping 60% to $13bn. At the same time, capex was cut 32% to $5.4bn, which along with other deleveraging steps (including $2.5bn of equity issuance) helped reduce the total debt burden by 16% to $44bn. As previously announced, dividends remained suspended. After $1.6bn of divestments announced since September 2015, another $4-5bn of disposals are proposed for 2016. The group targets a reported net debt reduction of $8-9bn by end 2016 and by another $2bn in 2017. While 2016 capex has been trimmed further to $3.5bn (vs. $3.8bn earlier), $400m of cost savings are being targeted. The trading business EBIT for 2016 is guided to be $2.4-2.7bn, similar to the 2015 performance. Subject to fulfillment of deleveraging targets and no further material erosion in the operating environment, dividends could be resumed from 2017 onwards.
This Morning’s News Glencore (GLEN LN)
Glencore (GLEN LN) has released full year production results which as expected show declining production across major commodities. Copper production was down 3% to 1.5mt while lead and nickel production was down 3% and 5% YoY to 298kt and 96kt respectively. Declining copper production reflected the cuts at the African operations while lower nickel production was due to an extended shutdown at the Sudbury smelter. Zinc production was, however, up 4% YoY to 1.45mt as despite the announced production cuts, output had been ramped up significantly in the prior part of the year. Coal production was 10% lower YoY to 132mnt due to curtailed production. Attributable oil production was up 44% to 10.6mnboe due to higher production in Chad. With many of the production cuts announced towards the end of 2015, the real impact is likely to be on 2016 output.
Glencore | Dalradian Resources | European Metals | Forte Energy | Freeport-McMoran | SolGold
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This Morning’s News Glencore (GLEN LN) Vedanta Resources (VED LN)
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Glencore | Berkeley Energy | Gemfields | Savannah Resources | Vedanta Resources
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Glencore | Botswana Diamonds | Golden Saint Resources | Vedanta Resources
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This Morning’s News Glencore (GLEN) Vedanta Resources (VED LN)
After posting weak H1 15 results, it had become clear that a material deleveraging was the need of the hour. Consequently, Glencore today announced a $2.5bn equity issuance plan (o/w 22% would be subscribed by senior management). Although the detailed terms of the issuance are still awaited. Additionally, the following measures would be implemented through 2016 – 1/ suspension of dividend until further notice; 2015 final dividend and 2016 interim dividend estimated to result in total savings of $2.4bn 2/ after reducing working capital by $4.7bn (including readily marketable inventories) in H1 15, a further $1.5bn of working capital efficiencies are being targeted through June 2016 3/ in continuation with its capex rationalisation drive, another $0.5-1bn of cuts are planned across commodities; this has been facilitated by abnormally weak producer currencies 4/ proposed asset divestment of $2bn – major portion targeted in 2015 5/ reduce loans and advances to commodity producers by $500–800m. At the operating level, Glencore has suspended operations at two of its African copper mines – Katanga (Congo) and Mopani (Zambia) – for the next 18 months. This would result in 400kt of copper output rationalisation. Both these mines reported an operating loss in H1 15 and are currently undergoing expansion/upgrading. Through a combination of the above mentioned measures, management targets to reduce its borrowings by >$10bn.
While it was widely believed by us that Glencore’s trading expertise would help it (relatively) outperform an ailing mining sector, the recent H1 15 results have trashed those expectations – at least in the near term. H1 sales were down 25% yoy to $86bn due to an across the board commodity price correction – including oil (-46%), coal (-18%), copper (-14%) and nickel (-17%), although volumes were healthy across most commodities (in both mining and trading). Adjusted EBIT plunged 62% to $1.1bn, mostly due to plummeting industrial (mining) division's profitability which was down 79% to $367m – despite $392m of cost savings and $879m of favourable forex benefits. While marketing (trading) did benefit from volatile energy markets (adjusted EBIT up 111% to $479m), the collapse of physical premia in the metal markets and reduced volatility in agricultural commodities resulted in overall trading EBIT declining 29% to $1.1bn. Record low oil prices resulted in Glencore impairing $792m of its Chad oil assets – effectively shaving off 50% of the acquisition price paid for Caracal Energy last year. The cumulative impact of the above factors and other losses (including the loss of $256m on the disposal of its stake in Lonmin) resulted in a net loss of $676m vs. a profit of $1.7bn in H1 14. However, reported OCFs were up 69% to $7.5bn. This was primarily driven by the $4.7bn reduction in working capital (including $1.2bn of readily marketable inventories) – thanks to abysmally lower commodity prices and some internal efficiencies. Even capex was slashed 26% to $2.6bn. Consequently, net debt was down 4.9% hoh to $47bn. But more concerted efforts are required to facilitate material deleveraging. Despite material operational weakness, Glencore too maintained its interim dividend (similar to its peers) at USc6 per share. Other than capex rationalisation ($6bn and $5bn in 2015 and 2016, respectively, versus earlier guidance of $6.8bn and $6.6bn), management targets $400m of cost savings in the industrial division over the next 12 months. While 2015 profitability guidance for trading has been trimmed to $2.5–2.6bn versus an earlier guidance of >$2.7bn, exacerbating price volatility (as witnessed over the past few months) could render more benefits.
Glencore | Aureus Mining | Exxaro Resources | FinnAust Mining | Orosur | Polyus Gold | Vast Resources
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Glencore | Gem Diamonds | Hochschild Mining | Rambler Metals | Sirius Minerals | Solgold
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This Morning’s News Glencore (GLEN LN) Hochschild (HOC LN)
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Glencore | Iluka Resources | Lucara Diamonds | Mariana Resources
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