David Herro (Trades, Portfolio) appeared on Bloomberg TV on May 17 and talked about Glencore (LSE:GLEN, Financial). Herro is chief investment officer for international equities at Harris Associates and Morningstar's International Stock Fund Manager of the Year in 2006 and International Stock Fund Manager of the Decade for 2000-09. No slouch.
In the interview, Herro seemed to be a bit fed up with Glencore's share price slump (notwithstanding sizeable buybacks). Perhaps in an attempt to make a commodity producer and trader a little more glamorous for a TV audience that is gone within seconds, he started by arguing that the market is missing that China is an electric car story. Glencore is predominantly invested in materials like cobalt, nickel and copper, he noted. These elements are all important in an electric future. If 10%, 20% or 25% of new cars sold are electric or hybrid by 2025, there will be a tremendous need for these materials.
The slide below from a Glencore investor presentation illustrates this:
When directly asked whether he's adding during the stock's slump, he declined to say. Herro's firm does not talk about trading, but he gave a strong impression he is adding because he did say that Glencore's shares are weak though its value has gone up, and it is going from strength to strength.
Herro then discussed how mining companies in general have delevered. Companies in the space have excess capital. They are growing cash flow streams. Some are finally increasing capital expenditures. There is little merger and acquisition activity. These are now great cash-flow-generating machines, Herro said, and Glencore is one of those returning money to shareholders.
Herro is exactly right. Across the board, major mining companies are still mindful about capital allocation. Most of them have shareholder-friendly policies including buybacks and expansions that should deliver high internal rates of return. It is important that there is an industry-wide trend of tight spending because that means there isn't an avalanche of supply coming to market. Miners are all set up to profit seriously if there is a demand surprise to the upside.
See Glencore's capital allocation framework:
Herro views the shares as a great opportunity today. It has a $47 billion market cap, while it has guided for $4.9 billion of free cash flow at the bottom of the cycle and over $10 billion at the top of the cycle. That means it is trading at 10x bottom-of-cycle free cash flow.
Herro said he thinks the valuation today is just too low. I have never been fund manager of the year, but I agree 100%.
Disclosure: Long Glencore.
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