A lot of AIM investors seem to view main market larger companies as being boring as you aren’t ever likely to multiply your capital overnight, but conversely it is unlikely that you will ever lose the lot either. By ignoring the larger companies, especially in the mining and oil sectors, you are potentially missing out on some very good gains, and with relatively low risk to your capital as these businesses tend to be so well diversified that any single event is unlikely to cause a complete share price collapse. With mining giants such as Glencore (GLEN) it is largely about playing the cycle of commodity prices as much as you can, as the share price is likely to track this fairly closely, and as it is a leveraged play on these prices, you tend to get over-reactions to the upside and downside, depending on which direction commodities are moving in at the time. This can cause some pretty large swings, considering the size of the companies, and Glencore for instance is down more than 25% from the high of 416p that it hit earlier this year. Its market cap currently sits at nearly £43 billion, but that is around £14 billion less than the peak it hit back in January, and all as a result of weakening commodity prices in the meantime.
So, basically, all of that value has been wiped off based largely on the spot price, rather than longer term expectations of metals prices – of course similar is true when commodity prices rise. To me this suggests that there is plenty of longer term investing value in this type of company if you believe that the average prices of the materials that they mine in years to come will be higher than the current spot price. You can spend hours pouring over the accounts and reports from these large FTSE companies, which can run into the hundreds of pages, but as long as nothing is fundamentally wrong and the company has a strong enough balance sheet to ride out any temporary rough periods, then future value will largely be dependent on those commodity prices, as long as it is able to sustain its operations longer term as well of course. In the case of Glencore, the main areas of interest in terms of what it produces are copper, zinc, nickel, cobalt and oil, although it also produces and deals in other commodities as well.
The most recent production report for Q3 2018 showed that copper, cobalt and nickel all performed particularly well, with double-digit increase in production (a 44% increase in the case of cobalt). What these three metals all have in common is that predictions for future prices are generally significantly higher than the levels we are at today, and that makes sense to me given how essential they are for electric vehicles in particular, and for lithium ion batteries, and all the extra wiring that would be used as a result of the wider adoption of battery power. It is true that there is still some risk on this front as alternatives could be found to the traditional lithium ion batteries, and in particular that could affect demand for cobalt as Tesla has already stated that it wants to move away from its use. But that has already been reflected in cobalt prices, with they having dropped from highs of over $40/lb earlier this year to less than $25/lb currently. There is less risk surrounding nickel and copper though, as it is hard to see how demand for both won’t be higher, and in general there has been a lack of investment in new mines, so I can certainly see a supply deficit to come.
Glencore has been performing well financially and enjoyed its best ever set of interims with the H1 2018 results, showing a post-tax profit of nearly $2.6 billion, and net cash flow generated from its operating activities of over $5.1 billion. The level of debt on its balance sheet is eye-watering at first glance, but a closer look reveals that it is at a manageable level. So much so that the company recently announced an additional $1 billion of share buybacks, on top of the original $1 billion which has now pretty much been completed. That to me certainly shows confidence from the management that the share price is undervalued, if it sees these buybacks as more value accretive than using that money for additional capex at its projects. It also returned $0.2 per share to investors in the form of two special dividends earlier this year. Earnings per share for H1 2018 were $0.19 and if a similar amount is earnt during the second half of the year, then that would mean that Glencore is trading on a PE ratio of under ten times, whilst at the same time exhibiting good levels of growth. So overall for me it isn’t hard to see value in buying these shares at around the 300p level, both because they look relatively cheap now, and also because of bullishness on its main commodities in the longer term. The only thing that would make me change my mind is any significant downwards market correction – although in that scenario pretty much all shares are likely to take a hit anyway.
Filed under: Glencore, IQE, Victoria, Haydale, Taylor Wimpey, First Group, Aggreko, Julie Meyer, Ariadne
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