Glencore optimistic on industrials, electric vehicles

VANCOUVER — Commodity giant Glencore (LON: GLEN) has been the proverbial elephant in the room during the current zinc rally, with the market pondering a scenario involving up to 500,000 tonnes of latent production that Glencore could bring back online in 2018.

The company unveiled on Dec. 12, however, that it had no such plans.

In fact, Glencore’s zinc output could decline marginally in 2018 to 1.09 million tonnes. It will restart the Lady Loretta underground mine near Mt. Isa zinc operations in Australia, but CEO Ivan Glasenberg said the company “may scale back current guidance even more if the price reacts negatively.”

Glencore highlighted its basket of commodities, headlined by copper, nickel and cobalt.

The company studied the impact of electric vehicles (EVs) on metal demand across the supply chain, from generation and grid infrastructure through to storage, charging and vehicle production.

Glencore concluded that targeting 30-million EV units by 2030 would annually require 4.1 million tonnes copper, 1.1 million tonnes nickel and 314,000 tonnes cobalt, which the company says represents 18%, 56% and 314% of 2016 production.

“Our commodity portfolio is not only underpinned by the ongoing electric vehicle revolution, but also persistent supply challenges. And we believe in putting our capacity idle if we perceive there’s an excess in supply, and that’s exactly what we did with zinc,” Glasenberg said.

Glencore’s Mutanda copper-cobalt mine in the DRC. Credit: Glencore.

“In terms of copper, the so-called ‘wall of supply’ didn’t come in 2017. Maybe there were new copper mines coming online, but people forgot about declining grades and rising strike risks, which are occurring across the industry. We’ve also seen underinvestment in copper that will create supply challenges moving forward,” he added.

Furthermore, Glencore said it would double cobalt production over the next two years. The company’s Katanga Mining (TSX: KAT; US-OTC: KATFF) in the Democratic Republic of the Congo (DRC) will reportedly produce 32,000 tonnes cobalt per year by 2019.

An oxide-ore stockpile at Katanga Mining’s Kamoto copper-cobalt mine in the DRC. The open-pit and underground mine has been undergoing US$880 million in upgrades since 2015 and may resume production later this year. Credit: Katanga Mining.

Glasenberg also cited strong fundamentals for thermal coal, which is underpinned by industrialization and urbanization in developing economies. He noted that rising demand for seaborne coal in Southeast Asia is offsetting a decline in the fuel across Europe and North America.

“Thermal coal really has key demand centres in emerging markets,” Glasenberg said. “It’s another commodity that hasn’t had a lot of investment over the past few years, and we aren’t seeing those big expansions in the Western countries. In fact, there’s negative supply growth in the West, while grades are declining elsewhere in the world.”

Finally, the company cautioned investors that “inflationary pressures had begun to creep in,” which boosted annual capital expense guidance by US$500 million to US$4.5 billion.

Glencore CEO Ivan Glasenberg.

Glencore promises to double its dividend, however, and pay shareholders at least US$2 billion in 2018.

The company indicated that spot/forward prices imply 2018 free cash flow of US$7.4 billion and earnings before interest, taxes, depreciation and amortization of US$16.2 billion.

BMO Capital Markets analysts Edward Sterck and David Gagliano have an “outperform” rating on Glencore alongside a £4 price target. The company’s shares have traded in a 52-week range of £2.56 to £3.88, and closed at £3.54 per share at press time.

Glencore expects to produce 1.47 million tonnes copper, 39,000 tonnes cobalt, 1.09 million tonnes zinc, 300,000 tonnes lead and 132,000 tonnes nickel in 2018.

The company has three core businesses responsible for marketing and industrial activities: metals and minerals, energy products and agricultural products.