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Glencore: Caution Warranted Despite The 11% FCF Yield

Published Sat, 21 Nov 2020 23:28:20 -0500 on Seeking Alpha

Seeking AlphaEarnings Analysis | Basic Materials | SwitzerlandGlencore: Caution Warranted Despite The 11% FCF YieldNov. 21, 2020 11:28 PM ET|| About: Glencore plc (GLCNF), GLNCYby: Opal Investment ResearchOpal Investment Research Long Only, Value, Growth At Reasonable Price, ContrarianSummaryGlencore posts a strong FQ3 production update, led by copper and zinc.
With the full-year guidance largely unchanged, there is plenty of room for an upside surprise in FQ4.
The investor update in early December could be a key catalyst, with updates to the medium-term targets and strategic actions likely to be announced.
While the FCF yield is attractive at c. 11%, I think the current valuation fairly accounts for the risks.
Glencore (OTCPK: GLCNF) shares have underperformed this year, despite offering investors a diverse commodity mix, exposure to base metals and bulks, along with FCF yield of c. 11%. However, there is a catch to the Glencore story, as regulatory overhang continues, with ongoing investigations by the US Department of Justice (DoJ) and the UK Serious Fraud Office (SFO). Additionally, operating challenges at key growth assets are a concern, while the elevated debt load does leave the company vulnerable to macro risks. As such, I remain cautious on shares heading into the December update.
Copper and Zinc Lead FQ3 Production Strength
Glencore reported strong FQ3 copper production numbers at 347kt (+18% Q/Q), with zinc production also solid at 310kt (+22% Q/Q). Cobalt production of 7.3kt and attributable oil production of 748kbbls were also positive highlights from the production report. Notably, the company's copper business benefited from the ongoing ramp-up of Katanga and strong milling performance at Collahuasi. For zinc, improved throughput at Mt. Isa and higher zinc grades at Antamina contributed to the strong operational performance.
By contrast, lead, nickel, ferrochrome, and coal production for the quarter lagged. However, much of the... Read more