Is small beautiful or is big better? Should you put your faith in mighty miner Glencore (LSE: GLEN), a FTSE 100 fixture with a market-cap of almost £42bn, or minnow oil driller 88 Energy (LSE: 88E), worth a meagre £60m, but with dreams of an Alaskan-sized future?
Think zinc
Big or small, both miners have one thing in common… 2018 was tough, with Glencore down 26% year-to-date and 88E down 40%. This compares to a drop of 10% across the FTSE 100, so both have underperformed, as has the natural resources sector generally.
Fears of a US-China trade war and the impact of Federal Reserve interest rate hikes are largely to blame, as these could slow global growth and demand for natural resources, particularly from China and Asia. The companies also face challenges of their own.
Corruption probe
Glencore may be one of the world’s largest miners, with exposure to more than 90 commodities and an added layer of diversification generating a third of its profits from its commodity marketing division, but that doesn’t make it bullet-proof.
As well as the global slowdown it also has to contend with an ongoing money-laundering investigation from the US Department of Justice, which has ordered it to hand over documents about its business in the Democratic Republic of Congo, Venezuela and Nigeria, raising the threat of massive fines. Big can be ugly, too.
Mixed picture
Another problem with big businesses is that private investors can struggle to get a clear picture of their multiple operations. While Glencore looks forward to strong bumper margins at its copper, coal and zinc mines next year, it must also contend with a jump in nickel production costs. Â
Chief executive Ivan Glasenberg, who plans to stay in his post for another three-to-five years, is focused on returning cash to shareholders by cutting debt and shareholder buybacks, which could hit a massive $1bn per quarter, according to some estimates.
Most analysts expect 2019 to be bumpy but Glencore looks nicely priced at 7.7 times earnings, with a forecast yield of 5.5%, and cover of 2.3. Glasenberg wants to get that share price up by the time he retires, which may work in your favour. Glencore looks good for the long-term, but the short-term may offer more volatility.
88 state
88E has fallen far below its year high of 2.88p, to today’s 0.94p. Initial investor excitement may be draining away, even though its Project Icewine boasts a vast 475,000 acreage on the world-class North Slope of Alaska.
Investors like to dream but belief has ebbed lately. This is partly due to the wider risk-off attitude, but also specific company fears. Summer flow tests disappointed, as the group faces difficulties accessing potential reserves, with its Icewine-2 operations disappointing.
Place your bets
There remains a massive opportunity and one world-class shale discovery could change everything. But 88E may have to endure a lot of knock-backs first. You don’t know whether its shale or conventional prospects will come good, and neither does management as it awaits further exploration, evaluation and appraisal results. This leaves investors at the mercy of news flow. 88E is a gamble, Glencore isn’t. That’s the biggest difference here.