Equity analysts at investment banking group Goldman Sachs believe the market is undervaluing the potential growth that Glencore’s copper business will have on the company and its stock in the long term, attaching a buy sign to the Swiss multinational commodity trading and mining firm.
The analysts, in a note to clients seen by Business Day, said Glencore, one of the JSE’s largest stocks and valued at just less than R1.3-trillion, offers one of the lowest capital-intensive organic copper growth opportunities.
Glencore’s stock is down 4.5% so far in 2024 on the JSE, where it has a secondary listing. However, Goldman says the market is oblivious to the boost the group’s copper assets will have in the long term.
“With lower-cost growth options in relation to peers across its operating assets and a longer-term development pipeline, its copper business has the potential to contribute significantly to growth. However, we believe the market now undervalues this,” Goldman said.
“We expect copper spend to increase to $3.1bn-$3.7bn a year between 2026 and 2028, as Glencore presses ahead with lower-capital growth options across several copper assets, that could drive a 20% increase in production by 2028 to 1.2-million tonnes.”
Goldman expects Glencore’s market capitalisation, which is now about £55bn on the London Stock Exchange, to rise to 550p a share over the next 12 months, implying a valuation of $94bn.
Glencore, headed by SA executive Gary Nagle, is one of the world’s leading producers and marketers of copper. It extracts and processes copper ore in South America, the Democratic Republic of Congo (DRC) and Australia. Glencore is also one of the world’s largest producers of cobalt, a major by-product of copper production.
South African Ivan Glasenberg is Glencore’s largest shareholder, with 9.7% of the group’s stock.
Supply deficit
Copper and cobalt are key metals in the transition to green energy, making them highly attractive to investors. Glencore also has exposure to zinc and nickel, both of which are used in wind energy turbines, solar panels, batteries and electric vehicles.
Goldman, which is bullish on copper, believes a structural supply deficit will emerge from 2025, possibly sooner with the supply disruptions and downgrades to the scale of projects witnessed across Latin America.
“Hence, we assume a long-run copper price of $4.44 a pound (real dollars) versus spot of $3.78.”
Glencore recently bought the Elk Valley Resources metallurgical coal business of Canadian firm Teck for $6.93bn in cash. The new business will be combined with its existing thermal coal production by the first half of this year. It is expected Glencore will then spin off its coal assets.
The group has been doing a lot of deal making in the past eight years involving more than 50 transactions. It sold $9bn of noncore assets in the period and spent $11.6bn acquiring new assets.
Goldman expects Glencore to continue pursuing opportunistic external growth and divestment of noncore assets, aligning with the company’s “dynamic approach” to mergers & acquisitions (M&A).
“Glencore has the balance sheet and cash-generative industrial business units to help underwrite external growth ... Exploring external options that enhance existing operations through consolidation could drive synergies and future scalability, potentially delivering enhanced returns and value creation, allowing it to potentially defer its organic pipeline.”
While bullish on Glencore’s prospects, Goldman turned neutral on Anglo American, worth about R556bn on the JSE.
Interest rates
The London- and JSE-listed group is the majority owner of Kumba Iron Ore, Anglo American Platinum (Amplats) and De Beers, which together contribute hugely to SA’s corporate tax base and mining royalties.
Goldman expects a higher drawdown of debt for Anglo in 2024, leading to higher net interest than consensus. The investment banking firm also expects Anglo to record negative cash generation after debt servicing and assumes lower capex in 2024 than consensus, “as we expect further deferrals of non-essential spend”.
Anglo’s share price took a beating in December after it presented a strategy to lower medium-term capital expenditure by $1.8bn between now and 2026 to soften the blow of weaker commodity prices.
Platinum group metals (PGMs) came under severe pressure in 2023, with many miners in the sector letting go thousands of workers.
Goldman said it expects continued near-term headwinds to consumer-facing (diamonds) and some industrial commodities (PGMs).
The bank said the risks facing Anglo include interest rate movements, commodity pricing, logistical and power challenges in SA, and operational safety across key assets, PGMs and coal.
“Given the difficult operating environment in SA, we assume the previous extension and growth projects for PGMs, diamonds and iron ore are deferred indefinitely, with copper growth prioritised,” Goldman said.
“Unless we see a rapid recovery in PGM and diamond prices, we see a risk that the dividend may be paused over the near term; this could preserve $1bn [annually] over the near term on our forecasts ... Non-core asset sales may be explored to finance growth and shore up the balance sheet.”
Goldman expects iron ore to average $110 a tonne in 2024, from $120 in 2023, “but a larger proportion of export volumes [higher margin versus domestic tonnes] at Kumba should help offset the lower expected sales volumes”.
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