Glencore (GLEN.L) doesn’t need any real introduction to the investment community as it’s one of the largest mining and commodity trading houses in the world. The company was hit by balance sheet fears in 2015 but took swift action to repair the balance sheet by keeping the incoming free cash flow inside the company and selling assets.


Glencore performed really well in 2016 as the company strengthened its balance sheet

Despite all the hiccups in 2016, Glencore reported total revenue of almost $153B, almost 4% more compared to 2015. This didn’t really have any impact on the company’s bottom line as the total cost of the goods sold also increased. The pre-tax less was narrowed down from $8.4B to $549M, but Glencore would obviously have been profitable if the $1.27B impairment charge wouldn’t have occurred.

Source: annual report

Despite the pre-tax loss, Glencore still had to take some taxes into consideration, which pushed the net loss to $1.19B based on the continuous operations. There also was an additional $2.1B net income from discontinued operations, so if you would include that number in the consolidated result, Glencore would have generated a net profit of $936M, or 10 cents per share.

It’s very clear the company is on the right track to indeed restore its profitability, but the income statement only tells you a part of the story. However, if you’d look at the cash flow statements, you’d notice the company is actually doing much better than you’d expect based on the income statement.

The operating cash flow was $7.9B and after deducting the taxes and net interest payments, Glencore would still have generated an adjusted operating cash flow of $6B and after the $3.1B capital expenditures have been paid, the net free cash flow on an adjusted basis was approximately $2.9B in 2016.

Source: annual report

A good result, but you should also keep in mind the $3.05B in capital expenditures also contained a bunch of growth-related investments. According to the annual report, approximately $900M was spent on expansion capex of which Glencore’s new nickel mine and the African copper assets took the largest bite. So on an adjusted and sustaining basis, Glencore generated a free cash flow of $3.8B or almost 40 US cents per share, and that’s absolutely excellent.

The asset sales and the fact Glencore has been able to keep the cash inside the company. Whereas its net debt position was approximately $42B as of at the end of 2015, the situation has improved rather substantially. At the end of 2016, the net debt level decreased to just over $30B, which definitely is a much more comfortable situation to be in. On top of that, it should also reduce the interest expenses by a few hundred million dollar per year which by itself will already boost the free cash flow from this year on.

The dividend is coming back!

Now the balance sheet is in a much better shape, Glencore has restarted its dividend policy. In a first step, Glencore will distribute $1B of cash to its shareholders in two tranches, payable in May and September of this year.

This could be seen as some sort of ‘intermediate step’ as it will initiate a new distribution policy in 2018. Whereas the 2017 dividend payments have been ‘fixed’ ad $1B, from 2018 on, the total dividend payment will be $1B plus a minimum of 25% of the free cash flow from Glencore’s industrial assets. Long story short, you could expect a substantial dividend hike in 2018, and we wouldn’t be surprised to see a 30-50% dividend hike even though more cash will continue to be added to the balance sheet.

Source: annual report

Looking at the future, Glencore seems to be a true believer in nickel and cobalt, as these two assets are some of the most sought after metals in the green energy sector. Glencore considers both base metals to be core commodities, as it produces the metals from its own mines whilst it also is one of the world’s largest recycling companies.

Surprisingly, Glencore also remains bullish on the coal sector as it claims coal will be absolutely needed to meet the energy demand in the world. Between 2013 and 2030, Glencore expects the world to consume approximately 120-140 billion tonnes of coal as even developed countries are building new coal plants.

Investment thesis

Glencore is back from never been really away. The balance sheet has been cleaned up by a combination of raising cash, spending its cash flow on debt reduction and selling assets. Glencore’s net debt is now approximately $30B (and still decreasing), which results in a net debt/EBITDA ratio of approximately three. That’s high, but Glencore is still working on achieving a ratio of 2 which will very likely happen through a combination of a higher EBITDA on the back of higher commodity prices and continuously reducing its gross debt.

Glencore will pay a dividend of approximately 7 cents (USD) per share this year, but we would expect this to increase to $0.10 from 2018 on as the new dividend policy kicks in.

Disclosure: the author has a long position in Glencore

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