I’ve been writing for the Motley Fool since 2010. Despite Glencore (LSE: GLEN) being a major FTSE 100 company, I don’t recall ever having written about it prior to this year. And I’m even more certain that the first time I had anything positive to say about it was as recently as July.
I’ll come back to why I’d never written about Glencore, because that is at the heart of the big lesson the company has taught me over the last couple of months. First, though, what got me interested in Glencore after having ignored it for so long?
In the latter part of July, the company’s shares were trading at more than 60% below their 2011 IPO price of 530p — giving a potential 150%+ upside if they could return to their former glory. Just for good measure, the dividend yield was running at a juicy 5.5%. At these levels, and with the mining sector out of favour, surely Glencore was at least worth having a look at as a potential contrarian value bet?
One big positive I saw in Glencore was “an owner-oriented management team wholly aligned with external shareholders”. Indeed, the chief executive had an interest in over 8% of the company’s shares. In its full-year results, Glencore had reminded investors of the company’s goal to grow free cash flow and return excess capital to shareholders, and the CEO expressed his optimism: “We look forward to the future with confidence”.
I persuaded myself that Glencore might be a great contrarian pick at the then price of 220p.
However, the shares continued to make new lows ahead of half-year results in August. As expected, the numbers weren’t good, but there was strong reassurance from the directors. They spoke of the company’s “strong and flexible balance sheet, with $10.5 billion of committed available liquidity at period end”, and were pleased to announce a maintained interim dividend, “reflecting our confidence in the quality of our underlying operations, commodities mix and sustainable cash flow profile”. The chief financial officer immediately bought 1 million shares at 173p.
If I thought Glencore was value at 220p, it was surely even better value now after the reassurances about the strength of the balance sheet and liquidity, sustainability of cash flow and dividend, and the big share buy by the CFO.
However, less than three weeks later, Glencore announced an equity fundraising, and a mass of debt reduction and capital preservation measures (including the suspension of dividends), after — the CEO and CFO said through gritted teeth — “recent stakeholder engagement”.
Glencore’s shares closed last Friday at 95p, having traded as low as 67p earlier in the week.
Now, Glencore’s shares may, or may not, recover; but — either way — this is a company I really should have continued to ignore. Why? Well, it goes back to why I’d never written about it prior to this year: namely, I simply don’t understand Glencore’s business.
You only have to read the “What we do” page, and particularly the “Marketing & Logistics” page, on the company’s website to realise that Glencore is a mind-bogglingly huge and complex commodities business.
Glencore’s “unique business model” means that even professional analysts struggle to get to grips with “what if?” scenarios, relating to movements in commodities prices, capital allocation, working capital, inventory and so on. Some analysts have been painting particularly bleak pictures. Glencore’s directors may have been confident in the half-year results, but institutional stakeholders were nervous and pushed for the radical steps the directors announced just a few weeks later.
Glencore’s falling share price may have caught my contrarian eye; the Board’s stake in the company and confidence (not least in share-buying after the results) may have been hugely positive, but I shouldn’t have let these things eclipse the tenet: steer clear of businesses you don’t understand. It has served me well over the years.
