Shares in FTSE 100 mining giant Glencore (LSE: GLEN) have fallen by more than 10% over the last week. As I write on Thursday morning, Glencore’s share price is falling again.
What’s happening to Glencore stock? And should I buy the shares to take advantage of a forecast 9% dividend yield?
I think the first thing to remember is that Glencore shares are typically more volatile than the wider FTSE 100. The company’s profits are directly linked to the prices of the raw materials it sells, such as coal, copper and oil.
Glencore’s share price is influenced both by prices today, and by market forecasts about how prices could change in the future.
A balancing act
The way I see the situation now is like a difficult balancing act. On one side, commodity prices are generally quite high and demand is still strong. Disrupted exports from Russia and fears of gas shortages this winter mean that Glencore’s coal business, in particular, is seeing record demand.
However, on the other side, we’ve got the growing fear that unaffordable energy costs and wider inflation could cause a global recession. If that happens, demand for energy and industrial commodities such as copper could slump, pushing down prices. That could have a big impact on Glencore’s profits.
Timing is difficult
Glencore generated half of its profits from coal during the first half of 2022. The group’s profits for the full year are expected to set a new record of over $18bn, before falling by around 35% to $12bn in 2023.
The trouble is that these broker forecasts have been changed many times over the last year. My guess is that City analysts will make further changes to their estimates over the coming winter, as market conditions evolve.
And market conditions could stay stronger for longer than expected. But at some point, I expect the tide to turn. Unfortunately, it’s impossible to predict exactly when this might happen.
Glencore share price: my view
The prices of crude oil, copper and iron ore have all fallen by at least 20% from peak levels over the last six months, as recession fears have grown. However, coal prices have continued to motor higher and are at record levels.
High coal prices could continue to support Glencore’s profits in 2023. But my guess is that high energy costs are also going to cause wider problems for the global economy. This could lead to wider falls in commodity prices.
Glencore shares currently trade on four times forecast earnings, with a 9% dividend yield. In my view, this ultra-cheap valuation is likely to be a classic warning sign that profits have peaked.
The main risk is that I may be making this call too early. It’s quite possible Glencore will continue to pay fat dividends for two or three more years.
However, I think the risk of disappointment is growing. In my view, there are better investment opportunities elsewhere today. For this reason, I won’t be buying Glencore shares at current levels.