Could the Glencore share price boom in coming years?

Possible demand drivers for natural resources might seem like good news for the Glencore share price. Our writer explains why he is not buying yet.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Tanker coming in to dock in calm waters and a clear sunset

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Mining is back! Or is it? After boom years, miners like Glencore (LSE: GLEN) have found the going tough lately. Last year, post-tax profits at Glencore fell over 80% and the dividend was cut by three-quarters. But with signs that demand for raw materials could be set to rebound even amid a fairly weak economy, might the Glencore share price rise from here?

Uncertain demand picture

On one hand, the outlook for mining continues to be plagued both by uncertainty and a generally weak economic backdrop.

More positively, though, governments including China have lately been laying out plans to increase economic growth. We know that sooner or later, demand for natural resources will come back strongly – we just do not know when.

Should you invest £1,000 in Rolls-Royce right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce made the list?

See the 6 stocks

Meanwhile, Glencore has already been performing well even while the price of many of the commodities it sells – such as thermal coal – has been weak. Revenue in the first half showed 9% year-on-year growth. Funds from operations grew by the same amount.

For now, it is hard to say with confidence what the short-term demand picture looks like and what that means for pricing.

Over the medium to long term, however, I expect demand and therefore pricing to grow. That ought to be good for revenues and especially profitability at Glencore, which like most miners has high fixed costs.

Share price could still go either way

If that happens, I think it could be very good news for the Glencore share price. It is 30% lower than at the start of last year. Strong pricing could help push up profits and I reckon the share price would follow.

The market cap is currently slightly less than £50bn. That is barely three times the company’s post-tax profits last year.

If pricing firms and profits soar, the current valuation could look very cheap in retrospect.

Created with Highcharts 11.4.3Glencore Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Looking from the other side of things, though, last year’s performance seems exceptional. There is a reason post-tax profits fell four-fifths this year. It demonstrates just how turbulent the market for natural resources can be. In itself that merits a discount in the share price.

Not only that, but things could get worse from here.

After all, while many economies are performing weakly, they are not actually in recession. A full-blown global recession – let alone depression – could be very bad news for resource prices and with them, the Glencore share price.

Why I’m waiting

In fact, that explains why I have no plans to invest in Glencore (or any mining companies) for now.

I think the share price may boom at some point but that could be years – maybe many years – in the future.

Once the economy is on firmer ground and we are more obviously in an upward swing in the economic cycle, I would consider buying into Glencore. For now, though, I feel I see better value in other sectors.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

photo of Union Jack flags bunting in local street party
Investing Articles

It’s back! Rolls-Royce shares come with a dividend again

It’s been a while but Rolls-Royce shares will soon be earning a dividend once more. However, our writer cautions income…

Read more »

Investing Articles

Recently released: this month’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Investing Articles

Here’s how much an investor would need to spend on Legal & General shares to target a £1,000 passive income

Using a well-known FTSE 100 firm as an example, our writer illustrates the passive income potential (and pitfalls) of stock…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

£10,000 invested in Unilever shares 12 months ago is now worth…

After years of inertia, Unilever shares have come to life over the last 12 months. And the FTSE 100 company…

Read more »

Investing Articles

Is it finally time for me to buy this FTSE 100 stock?

Stephen Wright has watched 3i outperform the rest of the FTSE 100 for what feels like forever. Is it finally…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Want to start buying shares with under £1,000? 3 things to figure out first

Christopher Ruane considers a trio of points he thinks a new investor on a limited budget could helpfully consider before…

Read more »

Buffett at the BRK AGM
Investing Articles

5 great lessons from the latest Warren Buffett letter

Christopher Ruane has been poring over the latest shareholder letter from investor Warren Buffett. Here's a handful of stock market…

Read more »

Investing Articles

The dirt cheap easyJet share price is staring me in the face

When Harvey Jones looks at the easyJet share price, he sees a brilliant buying opportunity staring right back at him.…

Read more »