The Glencore (LSE: GLEN) share price has fallen by nearly 30% over the last year, during a period when big miners such as Rio Tinto and Anglo American have seen gains.
GLEN’s record highs of more than 400p at the start of 2018 now seem like a distant memory. Shareholders may be wondering what’s gone wrong at this mining and trading group.
I’ve been taking a look at today’s half-year results to find out more. In this article, I’ll explain why I’m beginning to see some value in this FTSE 100 stock.
Grim headlines
The headline figures from Glencore’s half-year profits weren’t great. The group’s adjusted operating profit fell by 56% to $2,229m during the first half of the year. Funds from operations, a measure of cash generation, fell by 37% to $3,516m.
This news wasn’t a complete surprise. The market was already braced for a weaker performance from the firm, which has been hit by the falling price of cobalt and by problems at its African copper mines.
Spot the difference
With big miners such as Rio Tinto reporting bumper profits, it’s tempting to think that commodity prices must be rising. In fact, Rio’s record half-year profits last week were driven by just one factor — iron ore. The red stuff hit a high of over $120 per tonne during the first half, lifting Rio’s iron ore profits by 39% to $4.5bn.
This surge in profit disguised big falls in Rio’s half-year earnings from other commodities. For example, aluminium was down 64%, profits from copper and diamonds were 23% lower. Coal was down 27%.
The problem for Glencore is that although its trading business handles iron ore, it doesn’t own any iron ore mines. So the group has not benefited directly from recent high prices. This is one of the main reasons why today’s figures look so poor when compared to iron ore-mining rivals.
Troubles? GLEN’s got ’em
Admittedly, Glencore has some other problems too.
The company is currently facing a number of US legal investigations into alleged corruption.
Production at the Mutanda cobalt mine in the Democratic Republic of Congo will now be mothballed for two years. During this time, the firm hopes prices will rise, allowing it to clear a backlog of 10,000 tonnes of unsold production. Today’s results include a $350m write-down on the value this inventory.
Finally, the group’s African copper mines have also been underperforming and recorded a loss of $315m during the first half of the year. Chief executive Ivan Glasenberg said today that a programme of changes is under way to address this, but this is unlikely to be a quick fix.
Still a cash machine
Despite these problems, today’s accounts suggest that Glencore’s cash generation remains strong.
My sums show that the group generated free cash flow of about $7.7bn over the last 12 months, compared with $7.2bn in 2018, excluding acquisitions.
On this measure, Glencore shares are valued at around five times free cash flow. I see this as extremely cheap. This level of free cash flow also provides strong backing for this year’s dividend of $0.20 per share, which supports a yield of 7.3%.
It isn’t without risk. But in my view, the shares are starting to look tempting. A return to 400p could take some time, but I think the stock could be worth buying at current levels.