Tuesday, 3 March 2015

Glencore - not completely pessimistic about mining sector prospects

The mining and related marketing giant Glencore is back below the 300p level - a line in the sand I noted in my last write-up on the stock (link here).

Of course the eagle-eyed of you will have spotted that it has gone via 240p...but I am not too worried as courtesy of Randgold and (below) BHP Billiton (which I last wrote up here after their own results).  

The marketing division of Glencore continued to push on, particularly helped by the agriculture division.  

By contrast the classic industrial division struggled across the board.  No surprises there of course.

Before I do a quick sum-of-the-parts it is also useful to note that despite the lower prices for most minerals the company did generate free cash and make distributions to shareholders...albeit that the latter was assisted by net sales and positive working capital developments too.  A nice clear exposition by Glencore here (if only other companies would do something similar...)

The net impact of this was to reduce debt.  I like the look of the ND:ebitda multiple at x2.4 nicely less than the self-imposed x3 peak multiple.  

Of course these initiatives have to continue given the lack of immediate bounce back in metals prices.  Lower capex is no great surprise.  

However it is important not to be too defensive.  On this basis I was intrigued by this appraisal of the potential of the five core areas of their operations.  There are opportunities in the space.  

 So the sum-of-the-parts analysis.  I agree the marketing division is relative 'defensive'. Put a x12 multiple on a US$3bn earnings base and that is US$36bn.  As for the industrial mining side, we clearly are seeing below par earnings currently.  With suppressed margins maybe ebitda is the 'easier' earnings measure to use.  Traditionally a x6 multiple is some kind of sensible forward multiple for a cyclical but ultimately worthy business.  That would give a value of around US$60bn.

So adding the two above gives US$96bn, deduct the US$30bn of net debt and this gives a US$66bn EV or the equivalent of around a £43-44bn market cap.  With a current market cap of a little over £38bn that implies around 15% upside scope or a target price of c. 335p/share - which is close to the six month high.

My instinct is to still prefer BHP Billiton at the margin given its strong balance sheet, 5%+ yield and non-core upcoming spin-outs but Glencore has that mixer scope with this core mining position.  Interesting.

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