In January 2023, the Glencore (LSE: GLEN) share price was riding the crest of a wave. Back then it reached an all-time high of 575p. But in the last 12 months it has witnessed a brutal decline of 30%.
A number of issues might be weighing down its share price at the moment, and if there’s one thing I’ve learnt over the past few years, fishing for the bottom is a mug’s game. So why do I like Glencore?
Coal demerger
Unlike many of its peers that have been divesting themselves of their coal assets, Glencore has stood firm and not relented to demands from its major shareholders to transition away from fossil fuels.
Until recently, this has proved to be a good strategy. In 2022, spot prices for Newcastle (thermal) coal doubled.
Today, over half of its adjusted profit comes from its coal business. As the world transitions towards more cleaner sources of energy, such a strategy is clearly not sustainable.
In a major change of strategy, it has signalled its intent to get rid of all its coal mines.
Blockbuster US listing
In order to execute its strategy, it will first pay $7bn for a 77% stake in the coal assets of Canadian miner Teck Resources. After that, it will spin off the combined coal businesses within the next two years.
It intends the new standalone coal business to have its primary listing in New York. The reasoning behind this, according to the CEO, is that US investors pay less attention to environmental, social and governance (ESG) issues.
If he’s right, then the spin-off’s subsequent IPO should attract big investor interest. Indeed, some analysts estimate the new business could be valued as high as $35bn. That would make it the largest US coal miner.
Of course, a lot could change in the next two years, but the US listing should mean that existing Glencore shareholders receive a bumper special dividend.
Commodities supercycle
Yet the real allure of investing in the company today is not for coal but for its metals business. According to UBS, it accounts for 5% of the world’s mined supply of copper and 20% of cobalt.
Demand for copper is set to soar over the coming decades. A lot of this demand will come from electricity grid expansion, as EVs and heat pumps become mainstream.
In the UK alone, it’s estimated that National Grid will need to deliver over five times the amount of electricity transmission infrastructure in the next seven years than has been built in the last 30.
It’s a similar story with cobalt. This metal is used in EV batteries, mobile phones and jet engines.
In the US, the Inflation Reduction Act is a major tailwind for the business. US companies continue their efforts to bolster their manufacturing base. The effects of that Act are already being seen through a wave of EV supply chain investments.
Recession fears and a stuttering Chinese economy may be weighing down its share price, but I believe that as it transitions away from coal, its share price will see a major re-rating in the years ahead.
