- Glencore is cashing in on high prices due to the commodity boom, and this could dramatically increase returns to shareholders.
- However, its payouts remain well below mining rivals like Rio Tinto and Anglo American, which last week announced a combined $13.2 billion in shareholder returns.
- Miners benefitted from surging prices for commodities from copper to coal, as governments around the world unleashed trillions in stimulus
Glencore said it could dramatically increase returns to shareholders going forward as the company cashes in on high prices for the commodities it mines and trades.
Glencore announced $1.18 billion (about R16.9 billion) in dividends and share repurchases on Thursday after surging metals prices helped drive first-half earnings to a record. But while the buyback may be a welcome surprise for investors, Glencore's payouts remain well below mining rivals like Rio Tinto and Anglo American, which last week announced a combined $13.2 billion (around R190 billion) in shareholder returns, also after record profits.
Glencore's now in a position to pay out a higher percentage of its earnings after reducing borrowings, chief financial officer Steve Kalmin told reporters. The company cut net debt by 33% from a year earlier to the bottom of its long-term range. The current dividend policy is to pay $1 billion from its trading unit, plus 25% of free cash flows from the sprawling mining business.
"Given where the balance sheet is, we can move to much higher payout ratios potentially going forward," Kalmin said. "We wouldn't leverage the business further to pay distributions, but we're happy to move to 100% pay out ratios."
Glencore and its rivals have benefited this year from surging prices for commodities from copper to coal, as governments around the world unleash trillions of dollars in stimulus packages to help the global economy emerge from the pandemic, boosting demand for raw materials. At current prices, the company would generate $21.8 billion in profit this year, with a potential free cash flow of $11.5 billion, Glencore said.
"The subsequent economic recovery has seen prices of most of our commodities surging to multi-year highs amid accelerating demand and lingering supply constraints," said chief executive officer Gary Nagle, who succeeded long-time boss Ivan Glasenberg at the end of June.
"Fiscal and monetary stimulus, successful vaccine roll-outs and increasing momentum in relation to decarbonisation of energy systems should continue to underpin sector sentiment going forward."
The company's shares were 0.6% lower in London at 09:00, broadly in line with other natural-resource companies.
Glencore's powerful trading business benefited from the volatility in commodities markets, with core profit of $1.8 billion, almost on a par with the record $2 billion it reported last year. While trading earnings in the first half of 2020 were driven by energy, more than half of this year's profit came from metals and minerals as prices surged for commodities from copper to aluminium.
Glencore said last week that trading profit was expected to hit the top end of its guidance range of $2.2 billion to $3.2 billion this year, which would bring earnings from the trading business close to the record $3.3 billion for 2020.
Despite the record earnings, Glencore's returns to shareholders are dwarfed by the amounts being paid out by its rivals. Rio, Anglo and Vale SA all benefited from surging iron ore prices, a commodity that Glencore doesn't produce. The company's mines, which posted profits of $6.6 billion, have also seen some operational setbacks and Glencore last week lowered production forecasts for some commodities.
Still, its production is more weighted to the second half. And the company is set to benefit from a surge in thermal coal prices when it reports full-year earnings.
Glencore took $862 million of writedowns for the period, including $625 million on its troubled Koniambo nickel project in New Caledonia. The company plans a "thorough review" of the asset over the next six to 12 months, Nagle said Thursday.
Glencore also booked $216 million of legal related costs for the first half, which it said included provision for "one specific narrow aspect" of probes it's facing from several regulatory and enforcement authorities around the world. While thin on details, it's the first time the company has set aside money for the investigations, which include probes by the US Department of Justice, the UK Serious Fraud Office and Brazilian authorities.
Last month, a former UK-based oil trader at Glencore pleaded guilty in the US to participating in an international scheme to bribe officials in Nigeria to win favorable treatment from the state-owned oil company.