Glencore (LSE: GLEN) shares led the FTSE 100 on Tuesday, up 5% in early trading. The price has climbed more than 35% in the past five years.
Is it too good to pass up? Or have I missed the boat? The business does go in cycles. So I think we need to just ignore what the past price chart says, and look at the stock valuation.
Valuation
There’s a forecast price-to-earnings (P/E) ratio of seven right now. It looks set to rise a bit in the next two years, but not by much. That looks cheap.
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We also have a 10% dividend yield on the cards for 2023. But it’s a sector where we do see cuts.
In fact, the Glencore dividend has been cut four times in the past decade, the last time in 2020. Analysts expect it to fall a bit too, but they still have it at more than 8% by 2025.
So what might be moving the share price?
Merger bid
On 3 April, the firm revealed a bid to merge with Teck Metals, and then demerge the combined coal business. Glencore shareholders would own 76% of the combined outcome, with Teck shareholders owning the rest.
One hope is that we’d have cost savings as a result, and the board suggests we could see between $4.25bn and $5.25bn of post-tax synergy value.
But, so far, Teck has rejected the deal. It’s reluctant to get into coal and oil. And Glencore’s thermal coal business is set to be run down by 2040.
Moving away from coal
If the deal comes off, moving coal away from the core business at this stage sounds like a good plan to me. But it looks to be very much up in the air at the moment. If there’s no more progress and no deal is struck, I think Glencore shares could fall again.
And even if a new offer should seal the merger, it could still take a few years for us to know how it turns out in terms of costs and synergy.
Glencore is due to post a Q1 update on 26 April, and that could have an effect on the share price too. Commodities will be under pressure in the first quarter of the current year, and the market could feel the pain from the global economy.
So it will be good to see how production and sales are going at this stage in the year. Eyes, I guess, will be on China in particular.
Volatility risk
But right now, the Teck merger thing is the big unknown. And I think the share price might be a bit up and down while it goes on.
On the plus side, I do like the long-term dividend prospects for Glencore. And I’d be in for the long term anyway, so share price ups and downs in the short term don’t worry me.
Will I buy? I’ll wait and see how the merger plans develop. I think things could move quickly on that front.
