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 (ASX:RIO) and BHP Billiton (ASX:BHP) 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 (LON: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.
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