Underlying profits shrank by almost a third at Glencore PLC (LON:GLEN) in the first half of the year and the commodities giant confirmed that it will shutter the huge Mutanda mine in Congo due to low cobalt prices.
Income attributable to shareholders slumped 92% to US$0.2bn due to lower average commodity prices and $888mln of impairment charges related to Chad oil and African copper assets as certain oil exploration licenses expire and revisions to the Mutanda mine plan.
Adjusted underlying earnings (EBITDA) dropped 32% to US$5.6bn, below the City consensus and the weakest since 2016, with earnings per share plummeting from US$0.19 to US$0.02 and cash generation before working capital changes was down 21% to US$3.5bn.
Commodity prices plunge
The falling prices of commodities had a great impact on the FTSE 100 group, with copper falling 11%, zinc 16% lower, lead falling 20%, nickel 11%, coal 14% and cobalt a whopping 58% as the market moved into oversupply.
Chief executive Ivan Glasenberg said the first-half performance reflected this challenging economic backdrop, as well as operating and cost “setbacks” at assets that are being ramped-up or developed,
Changes have been made to the African copper business to address the challenges at Katanga and Mopani, with several management changes and a detailed operational review, but Mutanda being moved to care and maintenance by year end, “reflecting its reduced economic viability in the current market environment, primarily in response to low cobalt prices”.
“The rest of our business, however, remained strong and performed well,” he said, adding that he believed that for most of Glencore’s commodities the first-half price moves “are not representative of underlying supportive fundamentals”.
The marketing business generated EBIT of $1bn, down 35%, but only 13% if $350mln of non-cash cobalt losses are ignored, while aiming for full year adjusted EBIT guidance of US$2.2bn-U$3.2bn.
“Looking ahead, we are confident that commodity fundamentals will move in our favour and that our diverse commodity portfolio will continue to play a key role in global growth and the transition to a low-carbon economy,” Glasenberg said.
With difficulties isolated in African Copper and the perpetually challenged Koniambo, RBC Capital Markets said the core of the business "remains resilient".
"Copper cost guidance has increased outside of Africa to $0.92 from $0.80 but coal costs appear to have fallen by $2/t which should help to offset."
RBC noted that Glencore's enterprise value now trading on 3.1 times its 2020 forecast EBITDA "although pricing, especially in base metals will need to do some work into this deteriorating economic environment, however value is starting to accrue and the company’s balance sheet remains, in the current environment at least, in a robust position, which is a significant divergence to 2015".
Russ Mould at AJ Bell said life is not easy for the commodities giant at present, though that might lead to “playing the world’s tiniest violin in response”.
“The company is at the sharp end of the current trade war between China and the US given the former is the world’s largest consumer of the metals it produces and trades,” he said, giving the nod to the swift action to deal with African operational problems of its own making.
“Now it just needs to deal with probes by US authorities and the depressed state of a thermal coal market which had previously fuelled its profit. Which is likely to be just as difficult as it sounds.”
Glencore shares fell around 4% on Wednesday morning and were still around that level at 222.75p by the afternoon.