Glencore shares show investors wary despite strong results

Glencore, the Anglo-Swiss commodities trader and mining group surprised investors today (Wednesday 20th August) by announcing a share buyback, making it the first major UK resources producer to do so whilst chances of cash return by one of its peers had up till now been regarded by mining investors as higher.

Despite the buyback, Glencore was only rewarded with a minor lift of its shares.

Investors suggested the $1 billion buyback was about half the size expected by some analysts. Additionally, the size of the cash return, after the key recent disposal of copper mine Las Bambas, for $6.5bn, implied some proceeds may have been retained for M&A purposes.

Diversified mining groups have long been urged to increase discretionary shareholder returns instead of diverting cash to risky projects as many did in the past during a lucrative era of elevated minerals prices.

A period of multi-billion dollar write downs followed when metals prices reversed a decade-long upward trend. Several major mining groups were compelled to undertake strategic reviews including restructurings, disposals and spin-offs, of the like announced by BHP Billiton and Kazakhmys this week.

Glencore beats BHP Billiton to the punch

Investors in the sector had hoped for cash returns to mark the close of a riskier era of mining sector management, but a buyback from the world’s largest miner, BHP Billiton, was thought to be likelier than one from Glencore.

BHP was speculated to be preparing a cash return of $3bn, more than the ‘modest’ $1bn sum announced by its rival FTSE 100 resources firm Glencore.

The commodities trading and mining group also reported a swing to a net profit of $1.72bn during the second half of the year from a $9.39bn loss in the first half, the latter largely stemming from a $7.66bn write-down from the acquisition of Xstrata Plc.

And it’s the worry Glencore has not weaned itself entirely off from an earlier taste for risky acquisitions which may also have fed into Glencore stock’s only modest rise of 0.4% on Wednesday.  On the face of it, shares might have risen higher given the strong results.

Could Glencore end up buying former BHP Billiton assets?

Speculation Glencore could be a buyer of assets spun off by BHP Billiton earlier this week was fuelled by comments from Glencore chief executive Ivan Glasenberg.

“There are some good assets, but they’re non-core for BHP, they don’t move the needle for them,” said Glasenberg. “They want, big, easy to run operations with a long life. We’ve got a different structure, with trading units to feed into,” he added.

Acquisition worries and a rich prospective valuation in price/earnings ratio terms, estimated by some analysts at 13.7 times 2015 forecast earnings, 12% above the sector average, are certainly enough to make investors wary.

We look for shares to continue to straddle both sides of a recent pivot line around 358p-to-360p as Glencore makes efforts to reassure investors it will remain prudent, even in the event of eventual acquisitions.

Greater caution or profit realisation by traders will see the shares fall back toward a recent rising support line with a medium-term visit to 355p seeming feasible.