The $56.3 billion miner reported its full year 2016 results on February. Glencore recorded a 3.8% sales growth to $152.9 billion and $1.38 billion in profits compared to $4.96 billion losses in 2015.
In review, Glencore actually generated a $1.19 billion loss from its continuing operations, but generated a strong $2.12 billion profits from discontinued operations.
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“Our financial performance during 2016 reflects the quality of our industrial assets and the resilience of our marketing business.
“We believe that not all commodities are equal and, in general, we have the right ones. Glencore’s diverse asset portfolio, comprising low-cost positions in mid- and late-cycle commodities, such as copper, cobalt, nickel, zinc and thermal coal, positively matches the changing needs of current and future commodity demand.
“We take a highly disciplined approach toward supply, evidenced by curtailing production at a number of coal, copper, oil and zinc assets in 2015-2016 to preserve value for the longer term and assist in market rebalancing. We have significant operational leverage to improving fundamentals in our key commodities with substantial volumes of low-cost latent capacity that can be restarted as and when appropriate.
“We believe that our presence throughout the commodity value chain affords Glencore the unique position to generate superior shareholder value over the longer term.
“The last 18 months have been challenging for Glencore. On a positive note, we have demonstrated that Glencore is a strongly cash generative business, even at low points in the cycle, and is capable and willing to react decisively and quickly as circumstances require. Important lessons have been learned and the actions taken ensure that Glencore remains extremely well positioned to create value for all stakeholders.” – Ivan Glasenberg, CEO
Valuations
Glencore currently trades richly compared to its peers. According to GuruFocus data, the miner had a trailing price-earnings (P/E) ratio of 39 times vs. industry median 19.8 times, a price-book (P/B) value of 1.27 times vs. industry median 2 times and a price-sales (P/S) ratio of 0.37 times vs. industry median 1.84 times.
No dividend payouts were provided in the recent fiscal year.
In average 2017 sales and earnings-per-share expectations, Glencore had P/S and P/E ratios of 0.3 times and 24.5 times.
Total returns
Glencore outperformed the broader Standard & Poor's 500 index tremendously in the past year with 99.08% total gains compared to the latter’s 17.2%, according to Morningstar data. However, the miner underperformed the index in the past five years with 1.8% total loss vs. 13.3% gain.
Glencore
Glencore PLC (an acronym for Global Energy Commodity Resources) was founded 43 years ago and is an Anglo-Swiss multinational commodity trading and mining company with headquarters in Baar, Switzerland, and a registered office in Saint Helier, Jersey.
Glencore is organized and operates on a worldwide basis in three core business segments – metals and minerals, energy products and agricultural products.
According to the miner, each business segment is responsible for the marketing, sourcing, hedging, logistics and industrial investment activities of their respective products and reflecting the structure used by Glencore.
(Annual Reports)
Metals and minerals
Metals and minerals segment represents zinc, copper, lead, alumina, aluminum, ferroalloys, nickel, cobalt and iron ore, including smelting, refining, mining, processing and storage related operations of the relevant commodities.
In 2016, metals and minerals business sales improved by 0.6% to $66.3 billion or 37.4% total Glencore sales and delivered a total adjusted EBIT margin* of 5.6% compared to 2.1% in 2015.
*Glencore: Adjusted EBIT/EBITDA which is the net result of revenue less cost of goods sold and selling and administrative expenses, plus share of income from other associates and joint ventures, dividend income and the attributable share of underlying Adjusted EBIT/EBITDA of certain associates and joint ventures which are accounted for internally by means of proportionate consolidation, excluding significant items.
(Annual Reports)
Energy products
Energy products segment represents crude oil, oil products, steam coal and metallurgical coal, including investments in coal mining and oil production operations, ports, vessels and storage facilities.
In 2016, energy products sales improved by 6.5% to $89 billion or 50.2% of total company sales and delivered 0.1% total adjusted EBIT margin compared to 0.8% in 2015.
(Annual Reports)
Agricultural products
Agricultural products represents wheat, corn, canola, barley, rice, oil seeds, meals, edible oils, biofuels, cotton and sugar supported by investments in farming, storage, handling, processing and port facilities.
In 2016, agricultural products sales fell by 5.1% to $22 billion or 12.4% of total Glencore sales and delivered 2.4% total adjusted EBIT margin compared to 2.3% in 2015.
Sales and profits
(Annual Reports)
In the past three years, Glencore had sales and profit loss averages of -11.5% and -190.5%.
Cash, debt and book value
As of December, Glencore had $2.5 billion in cash and cash equivalents, and $33.2 billion in borrowings with a debt-equity ratio of 0.76 times compared to 1.07 times in 2015; 5.4% of Glencore’s $124.6 billion assets were intangibles having had a book value of $43.8 billion in 2016 compared to $41.3 billion the year prior.
In addition, the miner had a net debt* to adjusted EBITDA ratio of 1.51 times in 2016 compared to three times in 2015.
*Glencore: Net debt is defined as total current and non-current borrowings less cash and cash equivalents, marketable securities, readily marketable inventories and related adjustments for Proportionate Consolidation.
Glencore
“As previously communicated, we are now targeting maximum through the cycle leverage of 2x Net debt/EBITDA (previously <3x). This lower gearing target is aimed at sustainably reducing risk and providing greater flexibility and stability in the future. We believe our commitment to secure and thereafter maintain a strong Baa/BBB credit rating is well on track.”
Cash flow
(Annual Report)
In 2016, cash flow from operations fell by 63.6% to $4.82 billion. As observed, significant cash (out)flow came from accounts receivables and inventories.
(Annual Reports)
Capital expenditures were $3.05 billion leaving Glencore with $1.77 billion in free cash flow compared to $7.7 billion in 2015. The miner did not provided dividends to its shareholders, but allocated $91 million to noncontrolling interests. Also, Glencore raised $2.44 billion from share issuance in 2015.
(Annual Reports)
Glencore also allocated significant cash flow in debt repayments – amounting to $8.53 billion net proceeds in 2016.
Conclusion
Despite the overall industry downturn in the mining industry, Glencore actually exhibited growth in sales in 2016. The miner also exhibited a good level of profits in discontinued operations, albeit experienced less losses in 2016 when compared to 2015.
Glencore also aims to maintain its credit rating and has committed to this by impressively reducing its overall leveraged balance sheet in the recent period.
Meanwhile, the miner looks to return $1 billion to its shareholders this year and stated that it would allocate 25% of its free cash flow from industrial assets starting from 2018 in its new distribution policy.
(Google Finance)
Using three-year sales, profit, price-sales multiple averages and asking for a 20% margin would indicate a value of $36 billion— markedly conservative figure and several times lower than today’s current market capitalization.
In summary, Glencore is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
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