Glencore looks to electric vehicles for future growth
The commodities miner and trader has increased profit and paid down debt, preparing for ‘opportunistic’ acquisitions, as it puts a period of restructuring behind it
London — Glencore says electric vehicles and batteries will unlock future demand for metals, as the company positions itself for growth after a business turnaround in the past two years.
While the commodity trader and miner reported earnings that were slightly lower than expected, it continued to cut debt and cited "significantly better commodity prices" behind profit growth.
"The potential large-scale roll-out of electric vehicles and energy storage systems looks set to unlock material new sources of demand for enabling underlying commodities, including copper, cobalt, zinc and nickel," CEO Ivan Glasenberg said.
Glasenberg has turned around the business from a 2015 crisis, when investors dumped shares on concern debt was too high to weather a prolonged downturn in commodities. Debt levels are now much lower thanks to asset sales, cost cuts and rebounding metals prices.
Adjusted earnings before interest, tax, depreciation and amortisation (ebitda) for the first half were $6.74bn. That compares with analyst estimates for $6.8bn and is up 68% from $4.02bn a year ago.
The company’s marketing division reported adjusted earnings before interest and tax (ebit) that rose 13% to $1.4bn, citing "improving fundamentals" for the company’s core commodities.
Glencore also built a war chest in the first half of the year, and continued to cut debt as it prepares to ramp up acquisitions.
Despite improved first-half profits, Glencore kept its dividend unchanged at $1bn for the year and used the extra cash to pay down borrowings. Net debt was $13.9bn by June, less than half the level in early 2014.
"These results indicate the strong position Glencore has built in the recent past and we expect the momentum to continue," said Heath Jansen, a mining analyst at Citigroup.
Glencore shares slipped 1% to 336.5p at 8.03am in London. The stock is up 23% this year.
"Our extensive efforts to re-position our balance sheet and drive further industrial asset portfolio improvements over the last 24 months are reflected in our strong first-half financial performance," Glasenberg said.
The company’s strong balance sheet provided "headroom for highly selective growth opportunities", he said.
Glasenberg said in February that the "time is right" to reward shareholders after difficult years in 2015 and 2016, when the company suspended dividends and sold shares to raise cash.
Analysts have speculated that dividends could increase this year, following higher payouts from other mining companies.
Yet the pugnacious South African executive appears to be strengthening Glencore’s balance sheet first, a sign the company is looking at deals, rather than immediately returning more money to shareholders.
The company cut its preferred leverage ratio to 1.07, well below its target of two, suggesting it has the ability to pursue acquisitions. The leverage ratio reached three in 2015 after commodities prices tanked.
Glencore has already inked some deals, including last month agreeing to pay $1.1bn plus royalties for a large stake in a Australian coal mine. Earlier this year, its agriculture division approached Bunge to discuss a potential merger.
Speaking after the release of the results, Glasenberg said he would remain "opportunistic" on acquisitions, and reiterated his bet on agriculture, saying the company wanted to grow the business with its Canadian partners.
The commodities giant, alongside mining rivals Rio Tinto, Anglo American and BHP Billiton, has emerged from a two-year crisis as metal prices, particularly copper and aluminium, recover sharply.
The company was able to increase Ebitda and net income despite relatively lacklustre production growth, benefiting from rising prices for commodities.
"Glencore has the most attractive commodity mix within our wider coverage," Goldman Sachs mining analyst Eugene King said ahead of the results.
Glencore painted a bullish outlook for its trading business, with oil volumes rising strongly in the first half of the year to more than 6-million barrels a day, due to its deal with Russian state-controlled energy giant Rosneft.
The company said electric vehicles and batteries would boost demand for metals such as cobalt, of which Glencore is the world’s largest miner.