Glencore (LSE: GLEN) shares have fallen by 28% since last April. There are good reasons for the fall.
At the top of the list is the news that broke at the end of last year of an investigation by the Serious Fraud Office into allegations of bribery at the company. In addition, there have been nagging doubts about debts at the company for some time, although it has reduced them significantly over the last year. Its debt ratio is now 48%, which is not horrendous.
Another fear relates to the fall in annual profits in 2018, down by around a third from the year before. In the latest half-year period, profits fell precipitously from £2.8bn to £226m.
On the other hand, Glencore is a big dividend payer and offers diversification across the mining sector.
Cobalt and lithium ion batteries
Let me now turn to the reason I like Glencore. It’s very simple: cobalt.
Glencore is the biggest miner of cobalt in the world. That is significant because cobalt is a key component in lithium ion batteries.
The economics of electric cars is becoming more compelling. The cost of lithium ion batteries, the big cost component in electric cars, fell from almost $1.200 a kilowatt hour in 2010 to less than $200 in 2018. As the lifetime cost of lithium ion batteries falls and the longevity of the batteries increases, their carbon foot print reduces.
More to the point, we are very close to a tipping point when the life-time cost of an electric car including running costs, is less than the lifetime cost of an internal combustion engine car. Once that tipping point is crossed, lithium ion batteries will continue to get cheaper and I believe that demand for electric cars will explode.
With that rapid increase in demand for electric cars, demand for cobalt will grow proportionately. Glencore will be a big winner from this.
With the current Glencore share price at its lowest level since the autumn of 2006, I think its position in the cobalt market makes this company’s share price attractive. In my opinion, the bad news about the company is priced in, but the good news is not.
A concern, not a deterrent
I do have one nagging concern about Glencore’s longer-term prospects. Elon Musk, the boss of Tesla, which is leading the electric car revolution, has said he wants to eliminate cobalt from Tesla lithium ion batteries.
At the moment, this is just an aspiration. In any case, the rush of other car companies into the electric car market, who are not so keen to remove cobalt from batteries, means that for the next two or three years demand for the metal will grow very fast. Look further ahead to the midpoint of this decade, however, and cobalt demand may have peaked and be in decline.
Glencore has got several years to prepare and I believe that whatever the future components of energy storage technology may be, mining will be crucial.