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Market: LSE
Sector: General Industry
Latest Price: 298.33p  (3.01% Ascending)
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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.



Glencore to benefit from resilient red metal

December 13 2014, 7:00am

Escalating concerns over the outlook for the Eurozone and Asia took the shine off last Friday’s robust US employment report, while falling oil prices dragged many related sectors lower.

Opec cut the forecast for how much crude oil it will need to provide in 2015 to the lowest level in 12 years amid reduced estimates for global consumption and booming US shale production. Brent sank below $64 a barrel, its lowest level in over five years, extending a slide that has seen crude fall more than 45% since June.

European equities fell as renewed concerns over the political stability of the region intensified after Italy’s credit rating was downgraded and Greece’s presidential election was brought forward. Standard & Poors cut Italy’s sovereign credit rating from BBB to BBB-, one notch above junk status, citing the country’s weak growth. Meanwhile, the prospect of an election in Greece risks triggering an exit from the Euro or a fiscal debt write-off, which sent the Athens stock index sharply lower.

Economic data from the region failed to dispel the gloom, as Germany’s factories posted a meagre rise in output this November, as the slumping Euro failed to lift exports. Germany’s exports have become relatively cheaper, yet hopes of a corresponding jump in manufacturing have yet to be realised. 

Industrial production grew by just 0.2% in October compared to the month before, according to official data, falling short of the 0.3% growth expected by economists. German imports posted their steepest drop in two years, while exports from Europe’s powerhouse economy also declined, sending the Euro to a fresh two-year low against the dollar.

Meanwhile, Chinese stocks continued to shrug off disappointing data, amid growing expectations that recent signs of slowing growth will spur the People’s Bank of China to provide further policy accommodation. Exports grew at the slowest rate in six months and imports fell the most since March, yet the Shanghai Composite remains about 40% higher than it was in July.

On a domestic front, industrial output unexpectedly fell 0.1% in October, below expectations for a 0.2% increase, although the UK’s trade deficit narrowed to a seven month low in October. The Office for National Statistics said the UK's trade deficit in goods and services stood at £2bn in October, compared with £2.8bn in September, increasing the likelihood that growth will remain robust in the final quarter of 2014.

Technical analysis of the FTSE 100 illustrates the recent weakness after the index failed to break above resistance at 6750. The blue-chips have fallen through both the 50 and 200-day moving averages, which combined with the oscillators having slightly further to fall before becoming acutely oversold, points towards more short-term weakness. Support is seen at 6420 and 6310, which should underpin this wave lower.

The mining sector has come under pressure over recent months as the strong dollar and global growth concerns have dragged metal prices lower. Iron-ore has halved over the past year, as the likes of Rio Tinto and BHP Billiton have flooded the market with surplus reserves, sending the sector sharply lower. 

Copper, however, has only fallen 12% over the year on concerns of falling Chinese demand and fears of surplus supply in 2015. Yet Chinese consumption has proved to be resilient, with a surprise cut in interest rates easing credit conditions, forcing analysts to lower their surplus forecasts. Chinese copper consumption has grown at an average of 16% year over year from August to October. 

Glencore (Epic: GLEN), the Anglo-Swiss mining giant that completed the record-breaking acquisition of rival Xstrata in 2013, has fallen 22% over the past six months, despite having no exposure to iron ore. 

The UK’s largest listed miner has the biggest exposure to copper among the diversified miners, deriving almost half its profit from the red metal. Telis Mistakidis, head of copper at Glencore, said strong Chinese demand and expected mining disruptions could actually lead to a deficit of up to 1.8m tonnes next year.

Interim results on 20th August revealed earnings before interest, tax, depreciation and amortisation of $6.5 billion, exceeding consensus forecasts of $6.3 billion. The company also announced a share buyback programme of up to $1 billion that is 65% complete. 

At an investor day this week the Swiss miner and commodity trader said that it is planning to return excess capital to shareholders via dividends, share buybacks and/or other special distributions, while also considering strategic acquisitions. 

Glencore was rebuffed by larger rival Rio Tinto in July to create the world’s biggest mining company with a combined market value of about $150 billion. Chief executive Ivan Glasenberg, however, continues to look for prospects, stating: “A recent slump in oil and iron ore prices provides potential M&A opportunities from distressed sellers”.

Glencore trades on 10.5x forecast earnings, a slight premium to peers Rio Tinto and BHP Billiton, yet with over 25% earnings growth expected next year, it puts them on an attractive PEG of 0.42. The balance sheet is robust, with strong cash-flow and shareholders will receive a 3.7% yield, with the possibility of additional returns when the company reports in March. 

The chart of Glencore illustrates the recent weakness, taking the shares down to a 12-month major technical support level. Meanwhile, the bearish divergence that is becoming evident from the oversold oscillators indicates an improvement in underlying momentum, which should enable Glencore to outperform. 
The US economy remains strong, which combined with imminent additional stimulus from China and Europe, should support global growth and demand for raw materials. Glencore’s market leading position and strong balance sheet should enable the company to capitalise on resilient copper prices and strategic acquisitions within the sector. 
At the time of writing the share price is 294.85p, which investors might consider buying for a bounce with a tight stop loss below support at 286p. Near term targets are seen at 309.6p, 319.7p and 338p.

This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Glencore, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and Glencore’s corporate website.



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