With the Russia-Ukraine crisis in full swing, commodity prices are soaring, especially copper and coal. Nickel prices have skyrocketed 66% in a single day and surpassed $80,000 per ton for the first time since June 2007 in a huge metal squeeze.
The Glencore opportunity
One company poise to benefit from skyrocketing commodities prices is Glencore (LSE:GLEN, Financial), a diversified commodity trading and mining company which operates internationally, with more than 150 operating sites and 75 assets. The company has strong exposure to high-demand commodities which are surging in price right now, such as nickel, copper, zinc and even thermal coal.
Below is a breakdown of Glencore's profit sources:
- Copper (964 kilotons): 37% of Ebitda
- Thermal Coal (121 megatons) : 25% of Ebitda
- Zinc (804 kilotons): 12% of Ebitda
- Nickel (115 kilotons): 4% of Ebitda
Note: The above numbers use production guidance for 2022 and Ebitda percentages from 2021.
From the above outline, it is clear to see the company’s biggest commodity in terms of Ebitda is copper, of which the price is up 19% year-over-year to $4.70 per pound, or $9,400 per ton. Although not huge growth, copper is expected to increase in demand thanks to the “electrification” of the planet, as every electric wire or motor is made from copper.
Despite the move toward renewable energy sources, the demand for coal still increased 76% over the month, and coal made up 25% of the company's Ebitda in 2021. Glencore mainly supplies this coal to power stations in India and China, which don’t have the same ESG requirements as many European countries.
Zinc also set a 15-year high at $4,173 per ton, up 11% over the month. Zinc made up 12% of Glencore's Ebitda last year. However, Nickel is expected to be the real growth driver for Glencore, despite only making up 4% of Ebitda in 2021, as the 66% increase in price should help to boost profits substantially.
Source: Glencore investor presentation
Mining companies make their profits from the difference between the cost to mine the commodity and the sale price. Thus, when commodity prices surge, these companies' profits tend to be boosted substantially. In this case, Glencore has exposure to many high-flying commodities.
For example, In Glencore's latest investor presentation, the company said it expects to mine 115 kilotons of nickel in 2022. Using the nickel price of early 2022 at $6.69 per pound (or $13,380 per ton), the profits are huge! Nickel prices then soared to $30,000 per ton and then $80,000 per ton.
Strategic management
Glencore’s commodity trading arm offers a competitive advantage and allows them to trade price volatility in supply and demand. The firm has recently signed a multi-year contract to sell alumina to France's Aluminium Dunkerque, one of Europe's largest aluminium producers. Instead of selling its controversial coal operations, like many other mining companies, the firm instead plans to sell the commodity down with the aim of closure by 2040. This was on advice from a strategy activist investor, Bluebell Capital Partners.
Strong financial scorecard
Even before the commodity spikes of 2022, the company had great fundamentals. In 2021, adjusted Ebitda was up 84% to $21.3 billion and equity free cash flow was up 203% to $13 billion. The business also distributes a juicy 2.94% dividend.
Source: Glencore investor presentation
Valuation
The firm is not exactly cheap on a price-earnings ratio basis with a current price-earnings ratio of 17. However, with commodity prices rising sharply, it has a forward price-earnings ratio of 6 based on future earnings predictions, which is fairly cheap.
Insider ownership
Glencore has around 10% insider ownership, which is great to see. It means that management has skin in the game.
Guru trades
There aren't many gurus that own shares of Glencore. David Herro (Trades, Portfolio) is a long-term shareholder, but he has trimmed the position slightly in recent quarters.
Russia connection
Glencore owns a 10.55% stake in En+ Group, which is the controlling shareholder of aluminum mammoth United Company Rusal (MIC:RUAL, Financial). The firm also has a small 1% stake in Russian oil major Rosneft PJSC (MIC:ROSN, Financial). The approximate values of these investments were $789 million and $485 million, respectively, at the end of 2021.
The firm commented in a statement, “We have no operational footprint in Russia and our trading exposure is not material for Glencore... We are reviewing all our business activities in the country including our equity stakes in En+ and Rosneft.”
