Why the Glencore share price could smash the FTSE 100 this year

Roland Head explains why FTSE 100 (INDEXFTSE:UKX) miner Glencore plc (LON:GLEN) could be a dividend performer.

| 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.

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.

FTSE 100 mining giant Glencore (LSE: GLEN) has seen its share price battered recently, thanks to concerns about the firm’s assets in the Democratic Republic of Congo. However, today’s first-quarter update reassured investors that production was “largely in line across all commodity groups.”

Even better was news that full-year operating profit from the group’s commodity trading division is expected to be “within the top half of the $2.2 billion to $3.2 billion long-term guidance range”.

What does this mean for shareholders?

Glencore is battling against attempts to freeze some of its copper and cobalt assets in the DRC. The group runs the risk of losing its mining licences without compensation and is also facing a $3bn claim for damages from a former business partner.

But the firm’s founder and chief executive Ivan Glasenberg is a tough negotiator who is used to the rough and tumble of mining in Africa. And the group’s DRC assets only represent a part of its portfolio, which spans several continents.

Today’s quarterly update suggests that most areas of the business are in good health. When compared to the first quarter of 2017, copper production was 21,300 tonnes higher, at 345,400 tonnes. Zinc and coal production were largely unchanged, and nickel production rose by 21% to 30,100 tonnes.

An income buy?

Overall guidance for the year was left unchanged by today’s first-quarter figures. Based on analysts’ forecasts, this puts the stock on a 2018 forward P/E of 10 with a prospective dividend yield of 4.5%.

This payout should be covered twice by forecast earnings. Once again, the group’s trading division appears to be proving its value by providing strong profits in varying market conditions.

I share my Foolish colleague Harvey Jones’ view that Glencore could be a buy for income. But I don’t think it’s the only quality dividend stock in the mining sector.

A family affair

FTSE 100 companies with controlling family shareholders are fairly rare. One exception is copper miner Antofagasta (LSE: ANTO. This Chile-based mining group is controlled by the Luksic family, which has a 65% stake in the firm.

I’m quite keen on family-run firms as they’re often managed with a long-term view and a conservative approach to debt. Antofagasta is a good example. The group had net debt of just $1.1bn at the end of 2016 and reduced this figure to $456m during 2017.

Low costs, high profits

Cash costs at the firm’s copper and gold mines are among the lowest in the sector, supporting very high profit margins. Even in 2016, when the price of copper was low, the firm managed an operating profit margin of nearly 10%. When the price of copper rose in 2017, this profit margin rose to 40%.

First-quarter trading was in line with expectations and copper production is expected to rise by up to 5% this year. Analysts expect profits to rise by about 8% this year to $816m, or $0.82 per share.

This puts the stock on a forecast P/E of 16 with a prospective yield of 2.7%. Although this might not seem cheap, I believe it could be good value for such a profitable and well-financed business.

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.

Roland Head 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

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »