Glencore electric dreams are not for now

Less leverage, more capex

There’s no going back now, for Glencore, and that’s a good thing of course. Net debt keeps falling, as it has done each quarter since the end of the group’s annus horribilis 2015. It stood at $13.9bn at the end of the first half, down $1.6bn, compared to $30.53bn at the end of 2014. Leverage is also still going in the same direction. Glencore is closer to the theoretical ability to clear all obligations from one year’s core earnings. Net debt to adjusted EBITDA ratio was 1.07x, compared to 1.51x in H1 2016. Consider that total debt to EBITDA in March 2014 peaked at 9.09x.

Radically improved finances have enabled the group to ratchet up capital expenditure—slowly. The rise at the halfway stage was 7% to $1.67bn. Compare that to the relatively modest $961bn the group was able to credibly make a case for in 2014. Core earnings also continue to rebound, with an almost 70% advance as prices for most of the group’s commodities rose and adjusted margins expanded in mining. Glencore’s infamous trading business caught the tailwind of improved commodity economics this year as well. Marketing core earnings rose 13% to $1.4bn, adjusted for staged disposal of 50% of Glencore Agriculture last year. The remainder of Agri, now reported within ‘Marketing’ drove trading gains in H1, on a like-for-like basis, taking growth to 22%.

Electric dreams vs. hard cash

There are few surprises mind. With the half-year production report out on the 27th July—and when Glencore first published higher production and Marketing guidance—there isn’t a great deal more to buy on Thursday. That’s one reason why the stock has dipped in line with global markets this week.  Furthermore Glencore now trades at an eye-catching forward premium to FTSE peers. Mining assets alone are rated more commensurately with other London-listed producers. But shares hint at a ‘show me the money stance’, after GLEN’s 200% advance since autumn 2015.

CEO Ivan Glasenberg’s electric car gambit doesn’t appear to have been met with much enthusiasm so far, though it is promising. It’s predicated on forbidding barriers to entry in mining/production of the key element for automobile batteries, cobalt. Think Democratic Republic of Congo. Glencore’s high-grade copper and cobalt assets are deeply rooted there. Glasenberg also reasons that rising demand for fuel cells will eventually drive demand for alternatives to cobalt. Again, Glencore expects to be positioned advantageously to meet those needs.

Investors, as ever, are more interested in cash. Again, only old cash news in the H1 report. “Shareholder distributions” restarted in May, the group noted, with the completion of its commitment to return $1bn set to take place next month with another $500m payment. Further out, improved attributable cash flow will form the basis of another determination in February 2018, on top of an already announced additional $1bn. 25% of ‘industrial’ (as in not ‘trading’) cash flow will be paid. With total 2017 free cash flow set to amount to about $6bn, four further distributions of about the same size as each of the two this year, are implied. These look to be mostly in the Glencore’s price already. An exponential increase in the outlook is unlikely before 2H2017, given that some of its highest-margin output fell or rose only slightly into H1.

Glencore’s main priority then, into year-end and beyond from shareholders’ point of view isn’t electric dreams. Rather, investors want the group to stay disciplined and decide from its ‘continuing’ asset review what else it can sell or partially offload. Despite the commodity comeback, even Glencore can’t be entirely certain about the outlook.

• Glencore has had difficulties with a gently sloping, rather innocent-looking trend line that connects highs in September 2012, early 2013, July 2014, spring 2017, and right now
• With momentum struggling (Relative Strength Index sub-chart) we expect trend line resistance to continue to cap the stock for now
• Support is possible at 61.8% (322.68p) of December 2012 to October 2015—note price hesitated there twice during retracement, to the upside
• Below, proven support will be found at 265.50p