MIDAS SHARE TIPS: Coal can still power a portfolio as Glencore proves by taking full ownership of a huge Colombian mine for £ 427million
Old King Coal may have been a happy old soul in nursery rhyme, but being crowned fossil fuel monarch is less of a joy in these climate-conscious times.
That hasn’t stopped analysts from congratulating Glencore on taking full ownership of a huge Colombian coal mine.
The mining and extractive company is paying $ 590 million (£ 427 million) for the two-thirds of Cerrejon it does not yet own and buying up its two rivals, BHP and Anglo-American.
Dig: Mining and extractive company Glencore bought up rivals to own a large coal mine
Glencore is choosing the arguably more difficult task of managing its steam coal mines and continuing to own them while BHP and Anglo are all sold out.
The outgoing CEO Ivan Glasenberg believes he has the moral superiority.
“The disposal of fossil fuels and their task for others is not a solution and will not reduce the absolute emissions,” he says. ‘We are confident that we can responsibly manage the decline in our fossil fuel portfolio.’
Glencore has set tough emissions targets to become carbon neutral by 2050, which is more ambitious than other mining giants. The coal mines are expected to be exhausted by the mid-2040s.
Steam coal consumption may be declining in the west, but global consumption is expected to remain stable for the next five to six years, thanks largely to demand in Southeast Asia, says Ben Davis, mining analyst at Liberum.
Barclays analyst Ian Roussow describes the deal as “sensible” as Cerrejon is ceding control of Glencore rather than leaving it as a joint venture with liabilities.
Glasenberg expects the deal will pay for itself in two years, and Rousov says it will generate “attractive returns” for shareholders without jeopardizing the company’s plans.
So what’s left of Glencore when steam coal is no longer an option for much of the world?
Fortunately, the answer is “transition metals,” which will help create the batteries to store the renewable energy we all hope will power the planet.
Glencore is a major producer of copper, nickel, zinc, vanadium and cobalt. Currently, copper accounts for 36% of its business, coal for 34% and the transportation of raw materials around the globe for 10 to 15%.
Liberum’s Davis believes Glencore’s resource basket is more future-proof than its competitors, focusing less on iron ore and more on copper and other transition metals.
As demand for these post-pandemics continues to rise, many analysts believe Glencore’s share price will follow suit.
The stock has had a good run lately, but the stock has never returned to the £ 5.30 price it was quoted at in 2011, at £ 3.15.
That’s more than double the price they fell to in the depths of the pandemic in October 2020.
Tyler Broda, an analyst at RBC Markets, believes they need to run further and believes they could hit £ 3.60 while Barclays’ Rousov has a price target of £ 3.45. Glencore has also reinstated its dividend, which it cut at the height of the pandemic.
While it’s a modest payout that keeps the stock only yielding around two percent, Davis expects Liberum to provide more treats for shareholders – either in the form of a special dividend or a share buyback.
Midas judgment: Investing in steam coal will raise some eyebrows at dinner parties. However, Glencore is doing its best to deal with environmental commitments while creating value for shareholders.
Clouds are looming on the horizon, including the resignation of the current CEO and the shareholders’ revolt over the payment of his successor. But the company has a decent presence in hot commodity sectors and the Cerrejon deal is good for everyone involved. All in all, it’s worth digging deep here.
Traded on: Main market Ticker: VALLEY Contact: 020 7629 3800 or glencore.com