Glencore set for “outsized” returns as higher first quarter coal output dovetails with record pricing

GLENCORE produced lower copper in the first quarter of its 2022 financial year but analysts gave a thumbs up to the group’s overall performance including its marketing division which was set to post earnings at the top end of forecasts.

“Overall, we believe the first quarter update should be well received given weak results from peers and concerns over Russia exposure and counterparty risks facing the marketing division,” said analysts at Deutsche Bank in a note today.

“Geotechnical challenges” at Katanga Copper, Glencore’s Democratic Republic of Congo asset, resulted in group metal output of 259,000 tons for the first three months which was 10% lower than consensus of 288,000 to 294,000 tons (and 14% lower year-on-year). There was also a miss on zinc production.

Glencore subsequently reduced its full year copper guidance by 3% and 9% for zinc, although the former is also influenced by the sale of the Ernest Henry copper mine in Australia, a transaction that was closed in January.

Coal production was 11% higher year-on-year and there was also 2% improvement in ferrochrome production from Glencore’s South African assets. Coupled with extremely strong thermal coal pricing, the higher coal production bodes well for Glencore’s first half results due in August.

“A one- to two year period of elevated coal prices could make Glencore one of the leading shareholder return companies in the market … adding to what we already felt was a compelling self-help and re-rating story,” said Deutsche Bank. It calculated a total two year return of over 50% given its target price and cash return assumptions.

Morgan Stanley analysts said market tightness in the coal market was likely to persist for longer which would enable Glencore to generate significant cash “… and potentially deliver outsized capital returns to shareholders”. Added to improved capital discipline – with net debt restricted to a $10bn to $16bn range – the “set up implies very attractive returns” at Glencore’s first half results, the bank said.

Glencore said that extrapolating the first quarter performance of its marketing division, earnings before interest and taxation would “comfortably” exceed the top end of its long-term guidance range of between $2.2bn to $3.2bn a year.

Commenting on Glencore’s future prospects, UBS said there was a risk that an advisory note on Glencore’s climate transition report at the 2022 annual general meeting would recieve “only modest support”.

This was after both main advisory agencies recommended shareholders vote against it. Glencore’s climate action plan garnered 94% support at the 2021 AGM. “We expect management to remain committed to responsible ownership and depletion of coal,” UBS said.

Glencore’s rivals BHP, Rio Tinto and Anglo American have divested of their coal assets but the Swiss-headquartered group has argued that selling assets created a risk of less trustworthy custodianship of the assets which would remain in production in any event.