Home Deep Analysis Glencore Stock: Q2 Production Report Analysis (OTCMKTS:GLCNF)

Glencore Stock: Q2 Production Report Analysis (OTCMKTS:GLCNF)

by WOOWinvest
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Glencore Stock: Q2 Production Report Analysis (OTCMKTS:GLCNF)


We’ve been keeping a close eye on the mining industry this earnings season. For readers who want to drill down and compare quarterly production reports, here’s our coverage:

Continuing to work with Glencore (OTCPK:GLCNF) (OTCPK:GLNCY), the company plans to report a full results disclosure on August 4. This year, other important catalysts will be the UK SFO hearings scheduled for November 2 and 3 and the ongoing Swiss OAG investigation.

As a brief review, our buying case review is based on the following key takeaways:

Glencore’s product portfolio. We like diversification, but companies also have exposure to value-added metals for EVs and energy transition; higher-than-expected cash generated due to coal division (and marketing division); ESG recovery story based on resolving pending litigation, but especially trying to Convince Mr. Market Coal Options.

Second Quarter Production Results

Continuing the analysis of the production report for the second quarter, as Glencore put it: “Production was mixed in different periods (5 commodities up and 5 down in the table below).” Looking at Wall Street’s consensus expectations, Glencore’s output was weak and copper expectations were unexpectedly lowered. The mining giant also highlighted that working capital needs will increase due to marketing and higher industrial production.

Glencore's second quarter operating review

Glencore’s second quarter operating review

Source: Glencore Q2 Press Release

Regarding the main commodity results, here is an analysis of the Mare Lab evidence:

Zinc – The commodity missed market expectations by 3%. This is the result of COVID-19 absenteeism (as has happened with Rio Tinto and BHP Billiton); the copper sector missed Wall Street analysts’ expectations by more than 7%. As we’ve already mentioned, the outlook for 2022 has been revised down by 5%. This was driven by the Katanga site with geotechnical issues and the Mt Isa site with lower output (again, COVID-19 absences); coal was again the loser. From the data, the company’s output performance is -10%. In South Africa, supply chain constraints have resulted in reduced production. Bad weather conditions again reduced terminal production. Despite this, Glencore’s coal guidance remains unchanged.

By similar orders of magnitude, real prices for copper, zinc and nickel are 8%, 6% and 4% below consensus, respectively. This was partly offset by higher coal prices.

Glencore achieves price and volume outlook

Glencore achieves price and volume outlook

Source: Glencore Q2 Press Release

Conclusion and Valuation

Glencore’s portfolio optimization is also continuing. The company sold its 6.4% stake in Yancoal Australia for a total consideration of US$293 million. In July, the mining group also completed the sale of BaseCore Metals for $545 million. Based on our internal modelling and adjusting our data to the latest considerations, we arrive at a £5.50 target price from our previous valuation of £4.65. This is consistent with the valuation methodology we use for mining coverage. In fact, our valuation is based on a 50%/50% EV/EBITDA mix of 2023 numbers, thanks to NPV analysis.

Despite analysts’ expectations, the coal division plus marketing is an ongoing cash cow. By 2022, we estimate these two segments will generate 32% of Glencore’s market cap. We should also note that compared to its closest peers (except Anglo American), the marketing business is a real key point and current commodity market volatility will drive downline profitability.

To add more color to our analysis, we should say that Glencore is one of the highest dividend yielding companies in the industry, and its free cash flow generation covers this well. In fact, in 2022 and 2023, our internal team forecasts 15% and 14% returns, respectively, second only to Rio Tinto. However, due to the marketing department, Glencore has a 1.9x FCF coverage, which is more defensive than Rio Tinto’s current 1.2x FCF coverage.

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