Company Reports

Commodity prices diverged in the quarter. Despite solid China steel production, iron ore and metallurgical coal prices are down, while copper rose on supply issues and hopes of faster global growth. However, prices are elevated compared with history and cost-curve support.

Iron ore prices are lower on concerns over China steel demand due to its struggling property market and weak infrastructure spending. However, gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 51. It remains the cheapest miner we cover, trading 27% below fair value.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 25% of forecast midcycle group EBITDA from 2028) should be relatively resilient to changes in China’s rate of economic growth.

Demand growth from China has been the main driver of rising commodity prices in the past two decades. More recently, though, most commodity prices have fallen from highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Prices, nevertheless, are generally elevated versus the 20-year average, as well as relative to cost support.

Lower coal prices and less volatile commodity markets drove a large reduction in no-moat Glencore’s 2023 result. Net profit after tax, or NPAT, was down roughly two thirds compared with 2022 but was still a healthy USD 6.7 billion or USD 0.53 per share. This is the third highest NPAT over the past decade, trailing only the blockbuster profits earned in 2021 and 2022 driven by high commodity prices and elevated volatility in the wake of the covid pandemic and the war in Ukraine. Lower prices were the main driver of the 50% fall in adjusted EBITDA, to USD 17.1 billion, broadly in line with our estimate. Higher unit cash costs in its industrials business and decreased marketing earnings also contributed, with commodity markets continuing to normalize after the disruptions caused by Russia’s invasion and sanctions imposed on the country. Glencore’s balance sheet remains strong, with net debt of about USD 5 billion after netting out debt secured by highly liquid commodity marketing inventories.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 25% of forecast midcycle group EBITDA from 2028) should be relatively resilient to changes in China’s rate of economic growth.

Near-term iron ore prices are higher on strong China steel production. Gold prices are up on optimism over peak interest rates, driving a 2% rise in our estimate for no-moat Newmont, to USD 54. It is the cheapest we cover, trading 30% below fair value.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 20% of forecast midcycle group EBITDA from 2027) should be relatively resilient to changes in China’s rate of economic growth.

Commodity prices diverged in the quarter with strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices dropped on worries of a Western recession. Even so, prices are elevated versus history and cost-curve support.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 20% of forecast midcycle group EBITDA from 2027) should be relatively resilient to changes in China’s rate of economic growth.

No-moat-rated Teck Resources has agreed to sell 77% of Elk Valley Resources, or EVR, its metallurgical coal business in British Columbia, to no-moat Glencore. Japanese steelmaker Nippon Steel and Korean steelmaker Posco are to own the rest of EVR. The implied value for EVR (100% basis) of roughly USD 9 billion is modestly higher than Glencore offered earlier this year as an alternative to its initial proposal to purchase all of Teck. We think the sale price is reasonable for shareholders of both companies, with the deal expected to close in the third quarter of 2024. Teck intends to return some of the EVR proceeds to shareholders and maintain a strong balance sheet and its capacity to grow copper output, which seems sensible. Glencore will combine EVR with its existing coal business and, after paying down debt, intends to spin off the enlarged coal business to its shareholders.

Strong China steel production is supporting prices for steel inputs despite recession concerns. Otherwise, changes to our commodity price assumptions are mixed, led by higher near-term iron ore prices and lower near-term thermal coal prices. We think thermal coal miner Whitehaven Coal and minerals sands miner Iluka are the cheapest we cover. Both trade at 29% discounts to our AUD 9.50 and AUD 10.50 per share fair value estimates, respectively, with Whitehaven’s down 3% on lower near-term thermal coal prices, partially offset by a weaker Australian dollar. Peer New Hope is also down 3% to AUD 6.10 per share. Iluka’s estimate is unchanged, with a weaker Australian dollar offsetting lower synthetic rutile prices.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 20% of forecast midcycle group EBITDA from 2027) should be relatively resilient to changes in China’s rate of economic growth.

We raise our fair value estimates for no-moat-rated coal miners Glencore, New Hope, and Whitehaven after updating our assumed near-term thermal and metallurgical coal prices. Our updated fair value estimates also incorporate our latest foreign exchange rate assumptions along with higher coal royalty rates imposed by the New South Wales government. New South Wales will scrap the cap on domestic thermal coal prices effective July 1, 2024, which will be replaced with a 2.6% increase in state coal royalties from that date. However, higher royalties are more than offset by improved near-term thermal and metallurgical coal prices and weaker exchange rates versus the U.S. dollar. Our fair value estimate for Glencore increases by 4% to GBP 530 per share and Whitehaven by 3% to AUD 9.80 per share. Our New Hope forecasts already incorporated the new royalty assumptions; however, we increased our New Hope fair value estimate by 3% to AUD 6.30 per share given higher near-term thermal coal prices and the lower AUD/USD exchange rate.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 20% of forecast midcycle group EBITDA from 2027) should be relatively resilient to changes in China’s rate of economic growth.

Commodity prices have generally stabilized after falling on concerns that China’s reopening would underwhelm, along with worries over a recession in the West. Even so, they remain elevated versus history and cost-curve support. The Russian invasion of Ukraine and subsequent sanctions on Russia support energy prices and reinforce the importance of energy security.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

No-moat Glencore’s 2023 first half profit fell by roughly 60% compared with the first six months of 2022, but broadly met our expectations. Adjusted EBITDA of USD 9.4 billion was down 50% on last year driven by lower thermal coal prices, reduced sales volumes, and higher unit cash costs in its industrials business and reduced marketing earnings. The latter was due to lower commodity price volatility and as supply chains normalize in the wake of the Russia-Ukraine war. Glencore’s balance sheet remains strong with minimal net debt after netting out debt secured by highly liquid commodity marketing inventories.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra, which has agreed to merge with competitor Bunge, likely effective in 2024) are less China-centric but relatively small contributors, while its marketing business (roughly 20% of forecast midcycle group EBITDA from 2027) should be relatively resilient to changes in China’s rate of economic growth.

Glencore ranks among the most diversified of the large global miners. As China is the key demand driver for nearly everything Glencore mines, diversification benefits are limited. Glencore’s oil and agriculture businesses (held through its 50% stake in Viterra) are less China-centric but relatively small contributors, while its marketing business (about 55% of forecast midcycle group EBIT from 2026) should be relatively resilient to changes in China’s rate of economic growth.