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Glencore - imminent M&A splurge suggests you should go bye bye

By Chris Bailey | Thursday 10 August 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Who remembers the infamous zero pence share price target established by one 'teenage scribbler' broker on Glencore (GLEN) the thick end of a couple of years ago? Funnily enough, via a decent commodity marketing/trading business, a cute money raising and some decent tier 1 mining assets, Glencore shares did not trouble the scorers below even 50p and over the last 20 months have recovered back to levels seen four or five years back. Today's first half numbers continue that renaissance.

That is with a sensible looking combination of profit uplifts - led by that aforementioned commodity marketing/trading business which lifted its divisional profit hopes moderately - and a continued ratcheting up of the dividend. We will come back to the dividend shortly but for the bulls the key presentation chart highlighted Glencore's positioning in what it described as 'mid-cycle' commodities poised to benefit from continued Chinese economic expansion like copper, zinc, aluminium, nickel and lead...which conveniently Glencore is heavily overweight in!

Given that oil/gas and other areas such as platinum are described as 'late cycle' essentially the Glencore view of the world is that the maturing of the Chinese economy - the critical purchaser today at the margin of commodities globally - means you should avoid iron ore which dominates the portfolio of Rio Tinto (RIO) and less so of BHP Billiton (BLT). Frankly all of this makes for a pretty presentation graphic, but in the real world I remain unconvinced.

Certainly some commodities have better underpinnings than others and sometimes big picture changes can really help out, but in my view the biggest differential in the commodity space remains the quality of your mines - grade, life, cost and workforce matters.

By far the most intriguing part of the presentation was the assertion that the one-time troubled balance sheet is now in relatively rude health with net debt to adjusted ebitda (I know, I know not real numbers but hilariously the banks use this as one of their key covenants) just above one times whilst the company asserts that 'through the cycle leverage' should be two times i.e. Glencore is getting ready to splurge the cash. Now we know why there was no special dividend announced today contrary to the hopes of certain analysts.

The oft-quoted target for Glencore's M&A team is a US agribusiness called Bunge, which would ratchet up the company's agricultural trading sector exposure (conveniently one of those 'late cycle' areas cited by the company). Maybe Glencore's management can walk on water but having been at Bunge's offices before in White Plains, New York and tried to understand this fascinating sounding area and business, I wish them luck...but frankly there have been too many lowly predictable events in weird and wacky markets like sugar cane or in the cash flow statement to give me much predictive confidence. How I wish they could be banging the market's door down on good core mining projects in their preferred commodity areas with grade, production growth scope, governments desperate to cut a tax deal...

Funnily enough bad deals are generally bad for a share price. Maybe Glencore will not be successful in its pursuit of Bunge...or maybe it will be. Either way the 350p odd share price level has been a big resistance point for the last five years. If you have made a packet on Glencore betting against the 0p share price target from a pro, now looks the time to cash a decent wad in.

Chris Bailey is the editor of Financial Orbit

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