Earnings: are Glencore shares bargains hiding in plain sight?

Glencore Shares (LSE: GLEN) have been a good buy every day since 23 March 2020. At the time the shares were down around 110p, as the pandemic caused a massive market crash.

Since then, several global events have left commodities such as coal and oil trading at near-record prices. Glencore has benefited from this demand and has reported record profits for 2022.

Mining is a cyclical business. Record profits always make me question whether there is a possibility of a decline. However, I can still see many drivers for strong earnings in this sector. In this section, I will review Glencore’s latest results and explain what I would do with the stock today.

Record results: profits up 250%

2022 is a very good year for Glencore. The group’s revenue rose 26% to $256bn. After-tax profits for the year rose 250% to $17.3bn, up from $5bn in 2021.

These bumper results can generally be linked to one word – coal. Rising coal prices increase the company’s adjusted cash profit from coal production. They grew by $12.7bn to $17.9bn last year.

Looking at the bigger picture, operating profit from all aspects of energy – mining, trading, coal, oil and gas – increased by 353% to $21.1bn in 2022. This helped offset the 37% decline in profits from metals and minerals, such as copper and zinc, where costs increase and production decreases.

Shareholders were rewarded with $4.9bn in dividends and $3.6bn in share buybacks.

Ahead of 2023, management plans to pay a cash dividend of $5.6bn and buy back shares of $1.5bn. Today, the company pays a dividend of $0.44 per share and an annual dividend yield of 7.1%.

What are the risks in 2023?

Chief executive Gary Nagle said inflation was high and interest rates were higher “Indicates some risks to the economic outlook in 2023”. However, Mr Nagle reckons that China’s post-Covid reopening could help demand.

He also expects the global focus on decarbonisation and electrification to be positive for Glencore, given demand for materials such as copper, nickel and zinc.

I think the outlook is also quite positive. I do not believe that energy prices will collapse this year. However, I think investors should not expect a repeat of last year’s record profits.

Coal accounted for about 60% of Glencore’s operating profit last year. But coal prices have fallen sharply and are now back to levels seen before the Russian invasion of Ukraine.

What am I doing now?

Unless something unexpected happens, I think Glencore’s profits will drop significantly this year. Brokerage estimates show profits could drop by around 30%. It seems right to me, given what we know now.

The estimate puts Glencore at a price-to-earnings ratio of six. That may seem cheap, but it is worth remembering that it is still based on very high profits. This may be unsustainable, especially if several major economies decline in 2023.

I expect the stock to provide strong dividend income this year. But I don’t think it’s cheap to buy today. In my opinion, there is still a lot of good news about this stock. I think there will be better buying opportunities in the future.