Housekeeping: I will be increasing the amount of posting I do, and if you are a subscriber, you should expect the quality of writing to go down. I went the other way more recently, writing longer form, meatier thought pieces. I have enjoyed it and it certainly is more rewarding than half baked writing. That said, I don’t have that many interesting thought concepts brewing in my mind at all times, and waiting for interesting topics to coalesce comes at the expense of regular practice in writing, which I value. As such, feel free to cut and run as your inbox fills up, no skin off my back.
Glencore has been in the news lately, reporting outstanding results for 2022, thanks to peak cycle performance from its coal unit. Going back in time, Glencore (previously known as Marc Rich + Co) was primarily known as a commodity trader. It operates in the gray area of global commerce, connecting counterparties that its white-shoe competitors can’t touch and earning mouth-watering arbitrage spreads. Today, it appears more like a global commodity miner with a commodity unit attached. However, its swashbuckling commodity trader aura and culture still loom over its current operations, casting a shadow over the company.
Not long ago, in 2015, Glencore was struggling. This is not uncommon for highly leveraged firms, as cycles bottom out and expose the naked to all. However, Glencore made it through, and the scars show. The company has taken a more responsible capital allocation approach and, in its most recent performance report, boasted a net debt level effectively at zero. Bloomberg has quickly put out a piece on what’s next, now that Glencore’s capacity to fund massive growth projects is deep and primed.
But what does Glencore mean to me? Although I’ve admired commodity traders since my days as a commodity derivatives market maker, the sovereign nation penalties that can be imposed on such a business if they cross the wrong politicians can be significant. Make no mistake; while Glencore and its competitors speak today of net zero, ESG, etc., their bread and butter is doing business where others can’t, whether it is trading or mining. Fines by federal agencies across the world are merely part of day-to-day business at this type of company, and criminal charges are not unheard of. It always seemed like too many left-tail risks for the price.
However, here we are today, with the towering executive Ivan Glasenberg, the original Glencore guard and architect of its transition to mining, having moved aside. The company is positioning itself as a run-off coal miner and producer of green technology inputs for the future. Its debt is now zero. De-globalization and the rise of developing countries benefit its business directly. It holds significant positions in global production across important commodities, namely copper.
In the past bumper year, Glencore self-reported $24 billion in free cash flow. Its enterprise value (market capitalization) is approximately $75 billion. Despite 50% lower coal prices, it has guided to a more normalized $10 billion in free cash flow for 2023. Cash returns to shareholders for 2023 may range in the $3-4B zip code, as Glencore has a variable dividend policy, pegging a 2023 dividend yield at somewhere between 4-5%.
All in all, while in the past, I was hesitant to delve deeper into Glencore, I think it may make a nice addition to a diversified portfolio approach. Natural resource spot exposure from a firm with some characteristics of offensive tendencies during economic downturns that pays cash back to shareholders is nice. However, cash returns are too low for me given alternative options in the market today, but for now, this one stays on my radar.