The markets were not impressed yesterday with Glencore’s pitch that its first-half results represented healthy earnings in the face of “a normalisation of commodity market imbalances and volatility” — management-speak for a collapse in metals and minerals prices from last year’s elevated levels.
It is a stark reminder of how far Glencore, like other miners, is exposed to so many factors outside its control. Added to the price falls was an inflation-induced squeeze on costs. That took net income down 62 per cent to $4.2 billion. Cash from operating activities was down nearly $10 billion to $8.4 billion.
But the pill was sweetened by shareholder distributions and buybacks boosted from $2.2 billion to $5.2 billion, including a $1 billion special dividend. A $1.2 billion share buyback programme runs until next February. That is presumably enough to satisfy the two biggest investors, Qatar Holding and former chief executive Ivan Glasenberg, each with 9.2 per cent. Last year there was a $1.45 billion special dividend and a $3 billion buyback.
Arguably more important than the results was news that Chinese exports last month had endured their worst fall since the start of the pandemic. While the Glencore chief executive, Gary Nagle, played down the impact, it will exacerbate growth fears for the world’s second-biggest economy, a big Glencore customer.
The company is one of the world’s largest diversified natural resource operators —a producer and marketer of more than 60 commodities. It in effect runs an investment portfolio across the raw materials we all need, but arguably that is too much to juggle because so much cannot be controlled. Shareholders should bear in mind what sort of landscape they are buying into.
The other big consideration now with mining is ESG (environmental, social and governance), and it was prominent in the results presentation. Nagle said: “As the world moves towards a low-carbon economy, we remain focused on supporting the energy needs of today whilst investing in our transition metals portfolio.” That carries a distinct echo of St Augustine’s plea: “Lord, make me chaste — but not just yet.”
Nagle admitted that renewable energy was not supplanting fossil fuels as quickly as some had hoped, so it will be drawing comfort and profit from fossils for some years yet.
After Cop26, Glencore said it would phase out coal production — no easy feat when it produces 110 million tonnes a year. The plan was to switch the emphasis to copper, close 12 coalmines and halve annual greenhouse gas emissions by 2035 — but it will not get over its addiction that easily. Coal brought Glencore ebitda (earnings before interest, tax, depreciation and amortisation) of $4.5 billion in the latest half-year, copper only $2.1 billion. In March it bid $23 billion for Teck Resources, trimming that to an offer for Teck’s steelmaking coal business after the full-scale bid was rejected.
While Glencore’s coal operations may eventually be floated off, the next big controversy looks set to be deep-sea mining, which has already attracted criticism for its likely impact on biodiversity. The company has so far ruled out any involvement, but the question may in future be asked with growing persistence.
Nagle has downgraded full-year profits guidance to $17.4 billion, half the 2022 figure. “Overall, while the numbers are substantial, the results may leave stakeholders somewhat underwhelmed,” said Jamie Maddock, an analyst at Quilter. Citigroup added: “We expect mid-single-digit [percentage] downwards revision to consensus expectations for full-year ebitda and cashflow on the back of the weaker interim earnings.”
This column said Glencore shares were a hold at 416p in the week before Russia invaded Ukraine. In view of the continuing uncertainties, there is little reason to alter that view.
ADVICE Hold
WHY Has the management and resources to navigate an unpredictable environment
InterContinental Hotels Group
InterContinental Hotels Group has such a broad international spread that it has become a bellwether for the hospitality industry. In that capacity, it is signalling a return to conditions prior to Covid, including demand at a level that belies the economic headwinds.
IHG is so confident it has worked out the right strategy that it is heading downmarket to what it calls the mid-scale segment, comparable to Premier Inn or Travelodge in the UK. It should do well out of that move because there are obvious economies of scale to be had from constructing a new chain in this sector.
This was the icing on a cake that was much to investors’ taste. So too was the 24 per cent rise in revenue to $2.2 billion for the half-year to June 30, taking operating profit up 62 per cent to $584 million. Basic earnings per share more than doubled to 265.3 cents, paving the way for a modest 10 per cent lift to the interim dividend, to 48.3 cents.
The key driver was revpar — revenue per available room — which increased by 24 per cent compared with the first half of last year. Significantly, it was also ahead of the same period in 2019, before the pandemic. The average daily room rate was 7 per cent higher than last year, and occupancy was up 9 per cent. That last number still lags 2019, indicating scope for further improvement.
The group opened another 108 hotels containing 21,000 rooms — 40 per cent ahead of a year ago.
“We think the shares will be supported by second-quarter revpar momentum, improved Americas signings and an outlook supportive of pricing power,” analysts at the Jefferies financial group said.
A possible cloud on the horizon is a flood of rooms opened by hoteliers chasing customers, leading to lower room rates and retrenchment. However, the IHG management should have seen enough boom and bust to ride that out.
At the present rate of progress, earnings per share of 500p is a realistic prospect for 2023, which would be 14.4 times the share price. That should allow a 150p dividend, for a 2.59 per cent yield.
ADVICE Buy
WHY Sector is due a re-rating
