Glencore (OTCPK:GLCNF) shares have underperformed this yr, regardless of providing traders a various commodity combine, publicity to base metals and bulks, together with FCF yield of c. 11%. Nonetheless, there’s a catch to the Glencore story, as regulatory overhang continues, with ongoing investigations by the US Division of Justice (DoJ) and the UK Critical Fraud Workplace (SFO). Moreover, working challenges at key development property are a priority, whereas the elevated debt load does depart the corporate weak to macro dangers. As such, I stay cautious on shares heading into the December replace.
Copper and Zinc Lead FQ3 Manufacturing Energy
Glencore reported sturdy FQ3 copper manufacturing numbers at 347kt (+18% Q/Q), with zinc manufacturing additionally stable at 310kt (+22% Q/Q). Cobalt manufacturing of seven.3kt and attributable oil manufacturing of 748kbbls have been additionally constructive highlights from the manufacturing report. Notably, the corporate’s copper enterprise benefited from the continuing ramp-up of Katanga and powerful milling efficiency at Collahuasi. For zinc, improved throughput at Mt. Isa and better zinc grades at Antamina contributed to the sturdy operational efficiency.
In contrast, lead, nickel, ferrochrome, and coal manufacturing for the quarter lagged. Nonetheless, a lot of the drag is attributable to elements past the corporate’s management – coal, for instance, was impacted by the continuing labor strike at Cerrejon, which negatively impacted manufacturing. Ferrochrome was additionally impacted by the enforcement of strict lockdown measures in South Africa. Nonetheless, Glencore nonetheless expects to fulfill its operational targets for the yr (besides in coal), which I believe is commendable.
Katanga Copper Ramp As much as Help Earnings
I believe Glencore’s African copper manufacturing, which benefited from a stronger ramp up in FQ3, is price keeping track of. To recap, copper manufacturing in FQ3 was up c. 9% to 81kt, highlighting the truth that the foremost Katanga copper/cobalt mine continues to carry out effectively. Encouragingly, the mine is on observe to realize design capability by the tip of this yr (produced at c. 270 ktpa in FQ3 vs. a goal of c. 290 ktpa). A profitable ramp-up of Katanga will probably be key to driving earnings going ahead.
Supply: Glencore FQ3 ’20 Manufacturing Report
Largely Unchanged Steering Leaves Room for an Upside Shock
Notably, Glencore additionally maintained its full-year manufacturing steering for 2020, even tightening its goal ranges for many commodities. The exception was coal manufacturing steering, which was reduce by c. 4% to 109mt as continued industrial motion on the Cerrejon mine in Colombia is now anticipated to final by way of FQ4 as effectively. At this level, I believe strategic actions equivalent to returning free money move from its coal enterprise or spinning off the enterprise in its entirety could also be wanted to clear the coal overhang.
Nonetheless, the truth that the steering for different divisions stays unchanged displays administration’s view that FQ4 will probably be weaker Q/Q in key commodities. With the implied manufacturing run-rate for FQ4 decrease than FQ3, I believe expectations are low, and may Glencore ship manufacturing in the direction of the higher finish of its steering, shares might re-rate.
Supply: Glencore FQ3 ’20 Manufacturing Report
Disappointingly, there stays no replace on advertising and marketing since last quarter, when administration guided towards advertising and marketing EBIT reaching ” the highest finish” of the $2.2-3.2 billion EBIT vary in fiscal 2020 resulting from a “very sturdy” H1 ’20. As such, my base case stays for advertising and marketing EBIT to be c. $3 billion for the full-year.
December Replace is a Potential Catalyst
The Investor Replace presentation scheduled for December 4th will see Glencore replace its medium-term manufacturing and capex steering, together with its fiscal 2021 unit value steering. The corporate may also present new Scope 1 & 2 long-term emissions targets and replace its Scope 3 dedication, which ought to assist entice ESG flows. The important thing element I will probably be searching for is on the deleveraging progress – assuming administration efficiently delivers on its August goal to cut back group web debt to c. $16 billion by the tip of the yr, I believe there may be room for the corporate to renew dividends as quickly as fiscal 2021.
Moreover, I additionally stay up for updates on strategic initiatives for 2021, from the administration transition in coal (CEO & Head of Coal to retire) and zinc (Head of Zinc retired in July) to mitigation plans at Koniambo, which continues to wrestle – in stark distinction with the profitable Katanga ramp. Lastly, any updates on the regulatory entrance, particularly with the DOJ investigation, will probably be price keeping track of.
Total, I’m impartial on Glencore shares, regardless of the c. 11% FCF yield (equal to c. 9% P/FCF). I believe the valuation pretty displays the regulatory dangers, together with ongoing investigations by the US DoJ, together with operational challenges at key development property. Glencore’s extremely levered stability sheet additionally leaves it weak to macro dangers, and pending key strategic actions equivalent to an accelerated deleveraging or a derivative of the coal enterprise, I’m hesitant to purchase into the Glencore story.
Disclosure: I/we have now no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please pay attention to the dangers related to these shares.