Shares in commodities trading and mining giant Glencore (LSE: GLEN) have dropped 5% from their 20 May 12-month £5.05 high.
Right now, they trade on the key price-to-book (P/B) valuation measurement at just 1.7. This is cheap compared to the 2.1 average P/B of its peer group.
They look even cheaper on a price-to-sales (P/S) metric of only 0.3. This is by far the lowest among its peer group valuations, the average P/S of which is 2.3.
These low comparative valuations do not guarantee that Glencore shares will rise in price. But they do underline to me that they look a major bargain at £4.78.
Business outlook
5 July saw Glencore’s purchase of Elk Valley Resources (EVR) finally approved by the Canadian government. This should support its major expansion into the steel required for renewable energy infrastructure, helping it to build on its strong 2023 preliminary results.
These were released on 21 February and showed an adjusted EBITDA of $17.1bn. They also saw $15.1bn in cash generated from operating activities, which can be a powerful engine for growth.
The firm additionally stated that ongoing high commodity prices “augur well for top-up returns to recommence in the future”.
These top-up returns included $10.3bn in special dividends paid out from 2020 to 2022. In early 2023 they stopped after Glencore put aside $6.93bn in cash ahead of the EVR deal.
Chinese economic rebound
From 1995 to the onset of Covid in 2019, China was the key buyer of global commodities needed to power its expansion. Since then it has struggled to regain the strong economic growth that powered its demand for these resources. Glencore is a key supplier of many of these – including oil and gas, and now steel.
However, China achieved its target of 5% economic growth in 2023, and the same target is in place this year. June saw industrial production up 5.3% month on month, surpassing market expectations. The same was true of its trade surplus for the month, which rose to the highest level since July 2022.
2 July saw Glencore sign a long-term liquefied natural gas (LNG) supply deal with China’s Shenzhen Energy Group. LNG has become the global emergency energy source following Russia’s invasion of Ukraine in 2022. China is the world’s top LNG importer, and Shenzhen Energy Group is one of its major firms for the fuel.
A risk for the company is that China’s apparent economic recovery falters. Another is that the bullish trend in its key commodities markets reverses at some point.
However, consensus analysts’ estimates are that Glencore’s earnings will grow at 12.1% a year to end-2026. Earnings per share are expected to increase by 13.6% a year to that point. And return on equity is projected to be 15.3% by then.
Will I buy the shares?
I already have shares in other companies in the commodities sector, and I am happy with these holdings.
If I did not have them, I would buy Glencore shares today for their undervaluation, strong growth prospects, and the potential resumption of enhanced shareholder rewards.
