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Glencore Is Poised to Benefit From Higher Cobalt Demand

Cobalt is a key component of batteries for electric vehicles

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Dec 02, 2021
Summary
  • The price per metric ton of Cobalt is expected to go up following higher demand for electric vehicle batteries
  • There aren't many deposits worldwide, which will become a catalyst to higher prices
  • The production of cobalt mainly belongs to mining giants such as Glencore
  • Glencore is well-positioned to benefit from an uptick in the price of the commodity
  • Glencore runs profitable operations, holds a solid financial position and its stock doesn't seem expensive
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The global effort to fight against climate change requires that internal combustion vehicles, which are highly polluting, be gradually replaced with zero-emissions electric vehicles. We should therefore witness an increase in the demand for electric vehicle batteries over the next few decades, and for cobalt as well, given that this rare metal is a key component of EV batteries.

Miners of cobalt will have to speed up operations to cope with the expected higher demand for the metal. But since not so many deposits are available worldwide, manufacturers of batteries for electric vehicles will probably experience frequent shortages in the supply of cobalt. This represents a strong catalyst for higher cobalt prices in the future. Cobalt futures were at $65,874 per metric ton as of the writing of this article, for a year-to-date jump of 105.7%.

Globally, cobalt is currently being derived as a byproduct from copper or nickel production. So, to take advantage of the expected rise in the price of cobalt, investors could be interested either in contract futures or in miners that produce cobalt, such as Glencore plc (

GLNCY, Financial)(LSE:GLEN, Financial), as this Swiss miner and its shareholders are going to benefit from higher commodity prices.

Following many years of massive allocations of capital to the development of a cobalt business in the Democratic Republic of the Congo, Glencore today is the world’s largest cobalt mining company with a total production of nearly 65,000 tons mined in 2020.

In addition to cobalt, Glencore produces several other basic metals such as copper, nickel, zinc and lead. It also engages in the oil and natural gas businesses in several countries across the globe.

Its customers are usually industrial consumers operating in the automotive, construction, electronics, steel and energy industries.

The company performed strongly in the first half of 2021, recovering well from the Covid-19 crisis to hit a record with adjusted Ebitda totaling nearly $8.7 billion on total revenues of nearly $94 billion, up 32.3% year over year. In the first six months of 2020, the adjusted Ebitda was about $4.8 billion. The adjusted earnings were $0.24 per share, shifting from the net loss of $0.20 for the corresponding period in 2020. Top and bottom lines improved thanks to higher metal prices.

The financial position of the company strengthened, as indicated by the net debt-to-Ebitda ratio dropping to 0.6 as of the end of June, down from 1.4 as of the end of 2020. Also, the trailing 12-month interest coverage ratio of 10.22 indicates that currently, the company has no problems in paying the interest expenses on the outstanding debt.

On the London stock exchange, the stock traded at 3.70 British pounds (about $4.93) per share during regular hours on Thursday for a market capitalization of £48.90 billion, an enterprise value of £73.32 billion and a 52-week range of £2.19 to £4.20.

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The stock has an Enterprise Value-to-EBitda ratio of 5.26 versus the industry median of 8.37 and a price-book ratio of 1.84 versus the industry median of 2.22.

The 50-day moving average value is £3.61 and the 200-day moving average value is £3.24.

The 14-day relative strength index of 50 suggests that the stock is neither overbought nor oversold.

Additionally, Glencore grants a forward dividend of £0.09 per common share, yielding 2.43% as of the writing of this article. As a benchmark, the S&P 500 yield hovers near 1.31%.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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