Last year, commodities trading giant Glencore (LSE: GLEN) (NASDAQOTH: GLNCY.US) orchestrated a takeover of former FTSE 100 miner Xstrata.
In one fell swoop, Glencore became one of the UK’s largest listed miners: a £49bn behemoth that’s second only to Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT) (NYSE: BBL.US) in the FTSE 100 mining stakes.
Indeed, many investors have started to look at Glencore in direct comparison to Rio and BHP, but there is one — massive — difference.
Glencore’s trading activities continue to account for a sizeable slice of its revenue and profits, and, in my view, give the firm a different risks profile to the pure miners. The simplest way of illustrating this is with a comparison of revenue and profit forecasts for 2014:
|
|
Glencore |
Rio Tinto |
BHP Billiton |
|
2014 forecast revenue |
$246bn |
$49.6bn |
$69.0bn |
|
2014 forecast net profits |
$4.95bn |
$9.8bn |
$13.7bn |
|
2014 implied net profit margin |
2.0% |
19.7% |
19.9% |
Glencore’s massive turnover — five times that of Rio Tinto — is driven by its role as one of the world’s largest commodity traders.
These figures show how the firm’s sales and profits were split between its marketing (trading) and industrial (mining/energy) divisions during the first half of this year:
|
Glencore H1 2014 |
Marketing |
Industrial |
|
Revenue |
$93,617m |
$21,862m |
|
Adjusted operating profit |
$1,512m |
$2,112m |
|
Adjusted operating margin |
1.6% |
9.7% |
These numbers make it clear that while trading commodities generates vast revenues, its contribution to profits is more modest.
In theory, I believe Glencore’s trading activities could help the firm smooth out peaks and troughs in commodity prices, but such low margin activity also opens the door to risky, leveraged bets with small returns.
Indeed, it’s only Glencore’s giant, market-making scale that makes its trading activities potentially attractive to me: I’d normally shy away from such a high turnover, low margin business as being excessively risky, especially as Glencore has much higher debt levels than either Rio or BHP:
|
|
Glencore |
Rio Tinto |
BHP Billiton |
|
Net gearing (%) |
102% |
29% |
30% |
Which firm is a buy?
Glencore currently enjoys a racier valuation than either BHP or Rio:
|
2014/15 forecast |
Glencore |
Rio Tinto |
BHP Billiton |
|
P/E |
13 |
10 |
12 |
|
Dividend yield |
3.2% |
4.3% |
4.1% |
In my view, much of Glencore’s valuation is built on the powerful reputation of the firm’s chief executive, Ivan Glasenberg, a legendary trader and dealmaker.
Personally, I’m struggling to see the appeal of the Glencore shares: Rio and BHP both offer superior dividend yields, while BHP also offers an attractively diversified portfolio of oil and mining assets.
I’m not convinced that Glencore’s trading business will help it to outperform ‘straight’ commodity producers like Rio and BHP, which remain my preferred buys in the mining sector.