Why I bought Glencore stock in January

My income portfolio has been light on mining stocks for several years now. This has been detrimental to my wealth, as profits, share prices, and dividends across the industry have boomed in recent years. So I’ve been fixing it for the past few months, and my latest purchase is Glencore (LSE:GLEN) shares. This is why.

Full year results

Yesterday, the miner reported that 2022 copper production fell 12% year-on-year to 1.06 million tons. It comes after the company struggled with geotechnical issues at its Katanga mine in the Democratic Republic of Congo.

Meanwhile, zinc production decreased by 16% annually to 938,500 tons. Gold and silver production also declined. However, full-year cobalt production rose 40% to 43,800 tonnes, while nickel rose 5% to 107,500 tonnes.

Despite the fall in the output of copper and zinc, Glencore reiterated its production guidance for 2023. And it is still expected that the company will deliver over £10bn in net profit next year.

Longer term, product demand, especially copper and cobalt, should remain very strong. These raw materials are key to the global transition to clean energy. In addition, it is important to increase urbanization in developing countries.

Savings

Very cheap stock. Price-to-earnings ratio (P/E) 5.6. That’s less than half the average P/E for FTSE 100, which is currently around 13.5. And the price-to-sales ratio (P/S) is only 0.35, which is lower than the mining industry average.

And this is all despite the stock rising 37% over the past 12 months.

The stock also has a yield of 8% for 2023. Even if the dividend is cut, (which is in line with cyclical mining stocks), it will likely be higher than the FTSE 100 average of 3.7%.

This combination of extreme value, market-beating earnings, and long-term industry growth is why I buy the stock.

Risk

To a large extent, Glencore at the mercy of various commodity prices. And no one knows if that will happen this year or next. However, the analyst Goldman Sachs saw raw material prices rise by as much as 43% this year.

And Glencore is more profitable with its market position as a trader and producer. The marketing division can still make money trading commodities in volatile markets.

Another uncertainty is the controversy surrounding Glencore’s coal operations. The company is the world’s largest coal trader and the most profitable thermal coal miner. However, large institutional shareholders are putting enormous pressure on the company to detail how thermal coal production is aligned with net-zero targets.

Long term, the company has vowed to “manage down“coal assets. But last year, the company’s coal production increased by 6%, mainly due to the acquisition of extra mining capacity in Colombia in January 2022.

This is a thorn issue. There is a risk that institutional shareholders may start to dispose of shares on environmental, social, and governance (ESG) grounds. That is clearly not good news for the stock price.

However, it’s a risk I’m willing to take. I think that the supply-demand imbalance in the commodity market may persist for many years. This will bode well for Glencore’s profits and increase the prospect of more generous payouts.