Glencore (LSE:GLEN, Financial) (Switzerland), one of the world’s largest mining firms with leading market positions in copper, coal, zinc, nickel and cobalt mining, was a top contributor to the Fund’s performance during the fiscal year. At the company’s annual investor day in December 2021, management reinforced its plan to emphasize low-cost, large-scale assets in future-facing commodities while responsibly running down its coal business over time. We appreciate management’s focus on increasing risk-adjusted returns by exiting assets that do not materially contribute to the company’s bottom line, but require a lot of management’s time, are in high-risk jurisdictions, have limited mine-life or face other significant constraints. The price increases in Glencore’s primary commodities, including copper, zinc, nickel, and particularly thermal coal, have boosted the company’s financial results. Through September, Newcastle benchmark thermal coal prices averaged $350/year to date, nearly triple the price realized in the same period in 2021. This generated a 235% increase in EBIT year-over-year for Glencore’s industrial business in the first half. Glencore’s marketing business also benefited from the very tight market conditions for commodities. It generated $3.7 billion of EBIT in the first half of the fiscal year—more than the company usually expects to generate in a full fiscal year (which is typically somewhere between $2.2 and $3.2 billion). As a result of the positive results and balance sheet, Glencore announced a further $4.45 billion of incremental buybacks and dividends with its first-half results. Also during the period, the company reached settlements for the U.S., U.K. and Brazil investigations with figures that look to align with the $1.5 billion provision from fiscal-year 2021. We believe this positive development should eliminate uncertainty for the business and validate many of the changes Glencore has made to its compliance practices. We continue to believe that Glencore is an attractive holding with significant potential for robust cash flow generation, portfolio optimization and enhanced shareholder returns.
From David Herro (Trades, Portfolio)'s Oakmark International Fund third-quarter 2022 commentary.
