Glencore

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

Glencore is a multinational commodity trading and mining company with a global reach across various markets, acting as a vital intermediary connecting producers and consumers of physical commodities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Glencore is one of the world’s largest diversified natural resource companies, that operates in the realm of both mining and trading.

Business Overview

Glencore’s business model is two-pronged, consisting of a combination of mining operations and commodity trading activities.

  • Mining Operations: Glencore operates a diversified portfolio of mining assets around the globe that produce a range of commodities including: copper, cobalt, zinc, nickel, ferroalloys, coal, and aluminum. These are typically assets with long life and high cost of mining, with high focus on cost efficiency.
  • Trading Activities: Glencore plays an intermediary role in global commodity markets, buying, selling, and storing commodities to facilitate trade between producers and consumers. They have a huge presence in oil and gas markets, metals markets, agricultural markets, and more.

Revenue Distribution

Glencore’s revenue is distributed across different commodities.

Notably, energy products generate the largest portion of revenue with 65% contribution, followed by metals at 29%. Remaining revenues come from agriculture products. This is a significant change from 2022 numbers, where it was 61% from energy and 30% from metals.

  • Electrification: Driven by the energy transition, the demand for transition metals is poised to increase in the medium to long term. Copper and cobalt in particular are essential components of electric vehicles.
  • Geopolitical shifts: Trade tensions, supply chain disruptions, and deglobalization are increasing volatility in global commodities markets, creating trading opportunities.
  • Supply chain challenges: The Russia-Ukraine war, along with other factors, has created supply-side issues that disrupt markets and impact prices for various commodities.
  • Inflation and Interest Rates: The macroeconomic outlook, including rising inflation and interest rates, introduces significant volatility and uncertainty in the markets.

Margins

  • Glencore has consistently shown strong gross profits, but its performance, especially in mining, is affected by production costs and volume. As of 2023, margins are expected to be lower than those of 2022, due to decline in commodity prices.
  • Trading margins are strong, but are sensitive to the volatility and level of activity in the global commodity markets. The company expects trading margins to return to a normal level, from the levels achieved in 2022 and 2023.
  • Operating margins are heavily reliant on the economic cycle and price movements.

Competitive Landscape

Glencore operates in a highly competitive environment across all of their businesses.

  • In the mining sector, Glencore competes with several large global players. These competitors are capable of extracting large quantities of commodities and have large capital budgets, creating intense competition in pricing and extraction.
  • In commodity trading, Glencore competes with other large trading houses like Cargill, Vitol, and Trafigura, as well as with national companies.

What Makes Glencore Different

While many aspects of Glencore’s business can be replicated, here are some of its unique characteristics that set them apart from their competitors:

  • Integrated Model: Glencore has both mining and trading operations integrated, which allows it to capture profits along the entire supply chain, unlike companies that only specialize in one of the operations. This gives them access to the data and enables more efficient forecasting and operations.
  • Global footprint: They are one of the most geographically diversified companies in the world, with a truly global footprint across different continents. This provides diversification and also access to markets not many others have.
  • Expertise in Complex Situations: They are the largest traders of highly volatile commodities like metals, minerals and oil.

Financials

Glencore is a financially large company with significant assets across the globe. It should be said that Glencore’s financial statements are quite difficult to analyze, since different metrics can change a lot from period to period. Here is some relevant information about its financials, which is up-to-date:

  • Revenues: Revenue for the full year 2023 was $217.8 billion, which is substantially lower than $256 billion from previous year. The difference is primarily due to the sharp drop in commodity prices.
  • Net income: The company had a net income of $4.3 billion, compared to $17.3 billion from the prior year. The difference comes mainly from lower commodity prices and lower trading profits.
  • Free Cash Flow: Glencore’s free cash flow has been volatile due to the nature of its business but has stayed consistently positive. Full year free cash flow for 2023 was $2.3 billion, compared to $17.2 billion from 2022.
  • Debt: Glencore continues to reduce net debt. The adjusted net debt was down to around $4.9 billion at the end of 2023, compared to $7.5 billion at the end of 2022, despite a significant drop in profits. They target a net-debt-to-EBITDA ratio to be below 1.0x.
  • Shareholder Returns: Glencore paid total dividends of $2.4 billion in 2023. It has also returned another $3.6 billion to shareholders as buyback. This brings the total return to shareholders to around $6 billion in 2023. The return has been made possible by the good profits from the past, but management is still continuing with their policy of significant shareholder returns.
  • Capital Expenditures: The capital expenditure has been stable for several years, with a focus on maintaining and expanding existing assets, rather than acquisitions. The company plans to focus on high-ROIC operations, and has put a hold on further expansionary projects. It expects capex to average $5.7-$6.2 per year for the next three years.

In short, Glencore’s financials are healthy, with stable profits, high cash flow generation, low debt and focus on returning capital to shareholders. Management has also been disciplined in its capex and M&A activities to ensure value creation for shareholders.

Moat Rating: 2.5/5

Glencore has a narrow but persistent moat that is more structural than is obvious at first glance.

  • Network Effects: Glencore benefits from a huge network of counterparties, counterparties that are often hard to come by.
  • Scale: The company has many assets and operations that enjoy economies of scale which contribute to their success in commodities.
  • Integration: Glencore’s integration across mining and marketing provides better data, and therefore provides a better ability to optimize operations.
  • Brand: Glencore is very well-known in the trading markets, making its brand a valuable asset.

These factors are not all equally strong, therefore the moat is rated as narrow rather than wide. The moat is also susceptible to a number of risks, like changing customer preferences and technological disruptions that could lead to loss of competitive advantages. Also, trading business is a very competitive business, with low barriers to entry. Any company can start up a trading shop, therefore it’s hard to create a durable moat in this sector.

Legitimate Risks

Several legitimate risks could harm Glencore’s moat and business:

  • Volatility in Commodity Prices: Commodity prices are highly volatile and have a large impact on Glencore’s profitability and cash flows. This is a very high risk for the company.
  • Geopolitical Uncertainties: The company’s global operations are subject to geopolitical uncertainty and trade disputes. Recent events like the war between Russia and Ukraine highlight this risk.
  • Regulatory Risk: Mining projects can be stalled, become more expensive, or even become abandoned due to changing regulatory frameworks or sudden actions by the government, especially in emerging economies.
  • Technological Disruption: New technologies might enable rivals to offer low-cost alternatives to certain commodities (for example new low-cost steel production could make mini-mills obsolete). Or, new technologies can fundamentally alter the market (for example the effect of digital imaging on photographic film).
  • Environmental and Social Concerns: Growing demand for ESG investing means that some institutional investors may begin to avoid companies that operate in “dirty industries.” This also results in increasing regulatory burdens that hurt profitability.
  • Changing Customer Preferences: Customer preferences can shift. We have seen this in many examples like shift from fossil fuels towards renewables, or change of perception of specific brands. These shifts hurt companies whose operations are based on those preferences or trends.

Despite these risks, Glencore has shown resilience, with a diversified business model, and by adapting its investments to future trends.

Understandability: 3 / 5

Glencore’s business is complex for a number of reasons:

  • It operates across a broad variety of commodity markets and across a variety of different geographical locations, which makes it hard to get an overall picture.
  • Its financials are difficult to understand because of high volatility and use of complex financial instruments. *The commodity market is inherently very volatile, therefore forecasting earnings and profits are a very difficult task.

However, the basic mechanics of the business are easy to understand: Glencore is a producer of commodities, and a trader of commodities, with an aim to connect customers with the products they want. It also aims to keep costs lower than its competitors, and generate positive earnings.

Balance Sheet Health: 4/5

Glencore’s balance sheet can be said to be in fairly good shape due to the following points:

  • Debt reduction: They have substantially lowered net debt over the past years to levels that the management is comfortable with.
  • High cash flows: Glencore is capable of generating good cash flows, which they then use to pay dividends and repurchase shares.
  • Reasonable management: While not amazing, the management is disciplined and sensible.
  • Diversified Assets: Glencore has a well-diversified group of assets across the globe. The only downside is that the value of the assets are tied to the fluctuations in volatile commodity markets. But given how Glencore’s operations are very tied to the commodities, it’s something that they can’t do anything about.

In short, Glencore is a good company with solid long-term fundamentals. But given how cyclical the industry is and how little control the management has on prices, it is a very risky stock to own. You need to fully understand what you are buying before getting involved with the commodity markets.