The share price of miner and commodities trader Glencore is down 20% from the record high of 575.9p-a-share set on January 20 of this year. That’s despite gains of almost 12% since the recent low of March 15.

Prior to gains recorded since mid-March, the Glencore share price had been in decline since late January.

High commodity prices are in Glencore’s favour and the future looks bright for copper assets

Copper prices expected to rise over the next year due to demand from China. An increase in demand and tight supply means some analysts are predicting that copper, currently trading at $8835.75 a tonne, could set new record highs this year. The current record high of $10,235.5 was set exactly a year ago in April 2022.

After a year of high copper prices culminated in that high, the cost of a tonne of the industrial metal plunged to $7231 between May and July last year before the period of gains over recent months.

The reopening of the Chinese economy after Covid-19 pandemic restrictions were abandoned earlier this year, combined with a programme of government infrastructure spending designed to kick start China’s economic grown, is expected to see rising demand for copper this year.

As one of the world’s largest copper producers, another period of prices holding above $900 a tonne would be a major boost for Glencore’s earnings.

Long term fundamentals also support the case for elevated copper prices in the longer term. With copper a key component of renewable energy technology and electric vehicles, a recent S&P Global report forecast a doubling of demand for the metal by 2035.

Glencore agrees, recently stating:

“We expect demand to grow exponentially for renewable energy technologies, and the metals and minerals required to build them”.

But copper is far from the only commodity whose recently high prices have benefitted Glencore. In February, the miner revealed a huge 60% rise in its full year earnings for 2022 to $34 billion. Not all of the commodities mix that contributed to that total have as positive a long term outlook as copper.

Thermal coal, of which Glencore is one of the world’s biggest producers, has been extremely profitable for the company over the years. That was especially the case last year when prices soared due to a leap in oil and gas prices after Russia invaded Ukraine. Coal was turned back to as a way to keep energy bills down for consumers in especially Europe, where natural gas prices spiked especially high and supplies became uncertain.

However, the timeline of thermal coal’s contribution to Glencore’s revenues is now on a countdown. The company has committed to phasing out its current coalmines by 2040 and will make no further major investments as it pursues a commitment to become a net zero company by 2050.

Takeover talk

Glencore is also on the acquisition trail in its pursuit of growth. However, that approach suffered a setback earlier this week when Canada’s Teck Resources rejected an aggressive takeover bid by the London-listed Swiss miner. Glencore had offered Teck shareholders a merger that valued the Canadian company at $23 billion.

The proposal was a merger of the two companies and subsequent demerger of their combined coal businesses. Teck rejected the offer, citing a lack of desire to expose its investors to Glencore’s coal and oil trading business.

Glencore’s interest in Teck is mainly in its copper assets. Combining them with Glencore’s would see the merged company become the word’s third largest producer of copper by volume.

Source: Bloomberg

The deal for Teck isn’t dead yet but now looks unlikely. For a takeover to be resurrected, Glencore has less than three weeks to convince a third of Teck’s shareholders to vote against a plan to split the Canadian miner. That proposal will be put before a special shareholder meeting on April 26 and the dual class of shares at Teck means that if the split goes ahead, Glencore’s takeover bid would be effectively dead.

Convincing Teck shareholders to vote against its board’s recommendation would almost certainly require Glencore to put down a lot more money that the 22% premium on its valuation already rejected. The recent market for copper assets indicates that a premium of at least 30% will be required for a convincing case.

Should Glencore ultimately fail in its approach for Teck, seen as the most obvious big M&A deal in the copper mining sector, analysts have speculated on one potentially dramatic outcome – that the Swiss miner itself becomes a takeover target. And the only copper miner that would be expected to have the financial muscle to make such a potentially transformational move for the sector is the Australian miner BHP.

In large part thanks to high commodity prices that saw it book underlying earnings of $40.6 billion last year, $21.7 billion of which came from iron ore, $9.5 billion from coal and $8.6 billion from copper, BHP has reduced its net debt to just $300 million. Its target range is between $5 billion and $15 billion, leaving plenty of wiggle room to use debt to partly finance a big deal.

A theoretical combination of Glencore and BHP’s assets would create the world’s biggest copper producer and an extremely strong market position in other base metals used in electrification, especially nickel and cobalt.

Glencore’s plans for Teck signalled a readiness to sell off its coal business and the commodities trader and miner has already said it plans to sell of its agricultural commodities trading business. CEO Gary Nagle has also shied away from any categorical statement to the effect that Glencore won’t also divest its oil, gas and electricity trading business.

IF all of those businesses were divested, that would leave Glencore with a core of metals trading and mining assets. And that would sound like a perfect target for a BHP that had decided to tackle such a mega M&A deal.

Analyst forecasts for Glencore share price upside

Analysts at UBS and Bank of America recently changed their recommendation for Glencore to ‘buy’ from ‘neutral’ in March and set price targets of £5.60 and £5.80 respectively.

If the Glencore share price meets those targets, it would represent an upside of 21.55% to £5.60 from the current share price of £4.60. A rise to £5.80 would mean the company’s valuation had risen almost 26% from its current position.

If the Teck deal fails towards the end of the month and rumours of predator possibly becoming prey intensify, further valuation upside might be expected.

Strong portfolio of commodities

Overall, Glencore has a strong commodity mix mining and trading oil, coal and gas, all of which are in high demand. The energy crisis is ongoing and the continued need for copper as part of the energy transition is clear.

If Glencore divests its coal and oil, gas and electricity trading businesses, as well as agriculture unit, in the near to medium term, the capital raised would be expected to be re-invested in copper and other metals and minerals assets set to benefit from the megatrend towards electrification.

Or it could become a takeover target itself as a cash rich, low debt metals miner and trader. All in all, whichever scenario unfolds for Glencore, there could well be very healthy upside on the company’s current valuation over the next year or so.