Glencore is a leading player in the commodity industry, both in terms of production and in its trading operations. Its assets are relatively low cost, although with a tendency to be shorter life than the other major diversified mining houses. In a major economic upswing, Glencore should benefit from its broad exposure to energy- and industrial-related commodities.

 In terms of share price performance, Glencore had lagged its peer group (Anglo American, BHP Billiton, Rio Tinto) since mid-2018 – largely based on commodity price action (especially thermal coal), but also due to concerns around its governance.

• Our main long-term ESG concerns regarding Glencore are as follows: • Governance: core issues related to the US Department of Justice (DoJ) investigation, the dominance of the CEO, and longer-term Board succession.
• Environmental: exposure to stranded assets through its thermal coal assets.

To support our understanding of these risks, we have been actively engaged with the Glencore Board and management team – having undertaken over 15 direct engagements on the above matters over the past three years.

GOVERNANCE

Glencore has announced that it will cooperate fully with the US DoJ investigation and it is obviously in its interests that the investigation proceeds timeously. Coincidentally, during the course of the investigation, many of the original Glencore management team members who have been there since before its listing, have retired. While this is most definitely not an admission of guilt related to anything, it does allow Glencore to project a new face to the world; one that has more credibility when it stresses that behaviour which may have happened previously skirting close to, or over, the line will not be tolerated in future. The conclusion of this process will be when its chief executive officer Ivan Glasenberg retires in the first half of 2021, to be replaced by Gary Nagel. Further to this, the Board has implemented a wide-ranging culture refresh programme, along with a long-term Board succession plan that positions Glencore well to resolve the legacy governance concerns.

ENVIRONMENTAL

Glencore is one of the largest producers and traders of thermal seaborne coal (annual production over 100 million tonnes) and has, so far, taken a different tack to most of the major mining houses with regard to its investment in thermal coal production. The standard behaviour has been to sell the assets off, either to peers, private equity or via an initial public offering (IPO). Glencore has opted to stay invested in coal and manage the decline of the coal business. The rationale is that thermal coal will be needed for many years to come, at least a decade or two, and selling the mines to another operator will not see the emissions disappear – it just makes it someone else’s problem. Instead, by remaining in a listed entity, the management of the mines can be viewed as being carried out in a responsible manner: making a positive socio-economic contribution to the local community, while keeping to recognised environmental standards. Through investor engagements, Glencore has stepped up its disclosure on long-term climate risk and now follows the Task Force on Climate-related Disclosures (a global initiative to improve reporting of climate-related financial information). Further to this, the company has agreed to cap the production of coal to 150 million tonnes per year. Over time, the portfolio will reduce as mines deplete and close, and by 2050, Glencore is forecasting it will not be producing any coal and be effectively a net zero contributor of CO2. Glencore recognises that this could be controversial and has also said that if this does not satisfy shareholders, it is willing to consider further options, presumably including a full or partial sale of the coal assets. As it stands, thermal coal production contributes some 10% of company earnings before interest, taxes, depreciation and amortisation (EBITDA).

WHAT DRIVES THE GLENCORE VALUATION

While no two mining houses have exactly the same portfolio, there is a degree of similarity between the main mining companies, and some stark differences. Using the London-listed Big Four, the commodities produced can be viewed in the matrix on the following page (significant production only).

As can be seen from the table below, Glencore’s production has an overlap with all its peers, except that it has no significant position in iron ore, while maintaining a significantly larger coal portfolio. Since mid-2018, these have been on divergent courses. Iron ore has benefited from resurgent Chinese demand and some supply difficulties – to the point where the price has been substantially ahead of consensus forecasts and profits in this sector have been considerable. In the same time period, thermal coal has been under pressure as supply has been ample while the developed world, in particular, has been reducing its coal demand to align with the requirements of climate science.

The post-COVID revival in economic activity has also positively influenced the thermal coal price. Since the first half of 2020, coal price indices have doubled, as demand has overwhelmed supply. Unlike most commodities, the thermal coal industry is unlikely to see significant capacity expansions due to the higher price, for obvious reasons. So, paradoxically, while coal is not seen as a desirable commodity to produce, it could provide good and stable returns to existing producers for the foreseeable future.

A look at the individual commodity baskets of the main JSE-listed mining houses – Anglo, BHP Billiton and Glencore – is also instructive. The chart below shows that over five years, Anglo’s basket has powered ahead, propelled by iron ore and platinum group metals (PMGs), with the others all helping. BHP’s basket has done well, largely on the back of the strong iron ore price. Glencore’s basket did well until mid-2018, outperforming the others, and then meaningfully underperformed the peer baskets until mid-2020. Since then, although unable to keep up with Anglo’s rhodium/ palladium powered basket, it has at least kept up with BHP, despite having no iron ore exposure. With iron ore, every analyst’s favourite commodity to come under pressure – largely due to supply issues getting resolved over the next 12-18 months – the basket most at risk would appear to be BHP’s, not Glencore’s, hence our portfolio positioning.

OUR GLENCORE EXPOSURE

Accepting the view that there will be a global recovery in industrial production, and with most mining companies still experiencing some teething issues due to COVID-19, the potential for commodity prices in the shorter term appears to be geared towards the upside. We currently hold around 11.5% exposure to diversified mining houses in most of our funds (as at May 2021), compared with a benchmark weighting of around 9.5%. While Anglo American is our largest holding, at around 7.5%, Glencore is generally our second largest holding, despite it being a significantly smaller company than BHP. Our position size in Glencore is a function of our theme and price matrix, which integrates our economic and ESG views.

The attractiveness of Glencore comes from its commodity mix, its high cash-generating ability and also a perceived discount that exists in the share price due to its aforementioned ESG concerns. Over the past three years, we have seen a positive and an improving approach from Glencore’s management in terms of what we believe to be its core ESG risks. We remain actively engaged with the company and will continue to push for enhanced ESG disclosures and practices over time.

¹BHP produces small amounts of zinc and thermal coal.

²Anglo American is a small producer of thermal coal even post the Thungela IPO.

³Glencore is a small producer of oil, PGMs and metallurgical (met) coal.