By reputation, Glencore has an appetite for risk-taking hardwired into its soul, from high-volume trading of the world’s commodities to a fondness for doing business in some of the most politically volatile countries on the planet. The received wisdom is that investors susceptible to palpitations should probably stay away, but, as ever, the realities are more nuanced.
Glencore was founded as a metals, minerals and oil-trading business in 1974 by Marc Rich, a commodities trader who was indicted by the United States for tax evasion and illegal trading with Iran but who was pardoned by President Clinton on the latter’s last day in office. Based in Baar, Switzerland, it has been led since 2002 by Ivan Glasenberg, 62, the South African billionaire who presided over the group’s stock market listing in 2011 and detailed plans late last year to retire in three to five years’ time. Mr Glasenberg was also the architect of the merger in 2013 between Glencore and Xstrata that completed the company’s transformation into a fully diverse mining group, with a comparably far smaller trading business on the side.
It divides itself in three. The metals and minerals division produces and trades commodities ranging from copper, cobalt and nickel to zinc, lead and ferroalloys; the energy unit mines and trades thermal coal; and by far the smallest part, agricultural commodities, processes and trades products from wheat and barley to sugar and cotton. Glencore employs 146,000 staff in more than 50 countries and last year reported net profits of $3.4 billion on revenues of $219.8 billion that are so high because of the amount of commodities it buys, moves and sells.
For a little while now, the group’s shares have been trading at a sizeable discount to those of Anglo American, BHP and Rio Tinto, its big London-listed rivals. Much of this is because of inquiries being made by the US Department of Justice into Glencore’s business activities in the Democratic Republic of Congo, Venezuela and Nigeria going back more than a decade.
The four big words here are Democratic Republic of Congo, where Glencore operates two copper and cobalt mines producing materials that are critical components of the batteries that go into electric vehicles, but which is less than 10 per cent of the group. The country represents a big opportunity for Glencore, the world’s biggest producer of cobalt, but has caused it a series of headaches. The group was in a legal dispute, since settled, with Dan Gertler, the Israeli billionaire and a former business partner who had demanded billions in unpaid royalties. It eventually agreed to make payments to Mr Gertler’s companies in euros because it could not use dollars as he is on a US sanctions list. Shortly before leaving office, Joseph Kabila, the former president, passed a mining code that sharply raised royalties and taxes on international mining companies. And, having discovered a new type of ore at its Mutanda mine, Glencore still has to decide whether to press on with the costly investment required to process it. It has cut back production at Mutanda from 200,000 tonnes a year to 100,000 tonnes in 2018.
It is under pressure elsewhere, too. It is the world’s largest producer of thermal coal, but recently bowed to pressure from climate change groups and has capped output at 150 million tonnes a year. Other worries include the cyclical nature of the commodities market and sentiment about wider economic conditions.
The shares, down 3½p at 305¼p, trade at only 6.1 times Bernstein’s forecast earnings for a prospective yield of just over 5 per cent. That is undeniably cheap, but the risks remove the allure.
ADVICE Avoid
WHY Fully diverse with loads of growth potential but carries too many risks
Edinburgh Dragon Trust
The name kind of gives it away. The Edinburgh Dragon Trust started life in 1987 at a time when the term to describe the dragon economies of Hong Kong, Singapore, South Korea and Taiwan was very much of the moment.
Rapid industrialisation and soaring rates of growth meant that large parts of Asia represented an exceptionally big investment opportunity for those keen on the exposure. The investment trust, managed from the outset by what is now Standard Life Aberdeen, is still almost exclusively invested in Asia, but has since become more diversified and its biggest exposure by geography is now China, which accounts for just over 24 per cent of the portfolio.
Its stated aim is to generate long-term capital growth for shareholders, supplemented by dividend payments, and its benchmark is the MSCI AC Asia ex-Japan index. Having had a really rotten run over several years, it has turned its performance around, particularly in the past year. In the year to the end of August, its most recent, it lifted its net asset value by 2.3 per cent, just ahead of the index’s 2.2 per cent gain. Go back almost four years and its performance was falling by double-digit percentages. While it is still underperforming its benchmark over five years, its record is improving steadily.
The shares, up 3p to 379p yesterday, trade at a discount of about 11 per cent to its NAV, which is fine for buyers but uncomfortable for sellers. Last year, it became clear that several big institutions, including City of London Investment Management, wanted out and Edinburgh Dragon Trust put together a tender offer for 30 per cent of the shares that meant they could, at NAV minus the costs of the transaction. What is left is a trust that seems to be growing in confidence, in part as shares in some of its big holdings have enjoyed a strong recovery.
There are plenty of worries: an economic slowdown in China, wobbly locally listed technology stocks and the trade dispute between Washington and Beijing. The trust, nevertheless, is sticking to its optimism about the future for most Asian economies. Those investors that are in should stay with it.
ADVICE Hold long term
WHY It has recovered well after bad underperformance
