Glencore PLC (LSE:GLEN) isn’t a stock that gets many people excited these days.
Once a regular fixture in market chatter, the mining and trading giant has slipped off the radar lately, dogged by falling coal prices, patchy performance at its mines, and a more subdued outlook for its powerhouse Marketing division.
But that might be exactly why now is the time to look again.
Jefferies reckons Glencore shares are still seriously undervalued. Their price target is 380p, around 31% above the current price, but their sum-of-the-parts (SOTP) valuation suggests they could be worth as much as 467p. Even with some conservative assumptions, the upside looks meaningful.
What’s holding Glencore back?
A few things. Operational stumbles, especially in copper, have driven costs up while volumes slipped.
The group’s leverage to coal hasn’t helped either, given how prices for the fuel have softened.
Liquidity in the shares has also thinned. But for investors willing to take a closer look, the risk-reward trade-off has rarely been this favourable, says Jefferies.
Glencore has always done things a bit differently. Since its IPO in 2011, the company has focused more on generating cash from its assets than throwing money at big expansions.
Where other miners have dug in for the long haul, Glencore has taken a more nimble approach, using mergers and acquisitions to fill production gaps. That includes headline-grabbing deals like the Xstrata merger and last year’s acquisition of a stake in Teck’s coal unit.
Jefferies believes the company could now unlock value by spinning off its coal and ferroalloy businesses into a separately listed vehicle.
This idea was floated before, but didn’t make it past shareholders. A fresh push could be better received now, especially given how much higher the valuation could go for the remaining business, dubbed “RemainCo”.
And if Glencore doesn’t go for a demerger, it could still attract attention from other majors looking for consolidation opportunities. It has often said “M&A is in our DNA”. Selling out completely could be part of that, too.
In the meantime, the shares trade on a free cash flow yield of 8.5% and a forward EV/EBITDA multiple of 5.7x. For a business with this kind of optionality, those are punchy numbers. Jefferies has it as a top global mining pick... and it’s easy to see why.
In late morning trading, the shares were up 1.8% at 295.35p.