Glencore PLC (GLNCY) is a former recommendation; our previous sale of the stock related to legacy issues that had been largely concealed and were associated with former management, recalls Stephen Leeb, editor of The Complete Investor.
Former management included the notorious Marc Rich, one of the company’s original founders. What is relevant now is that the company is arguably the most diversified commodity play in the world; its past problems were settled in late May with hefty but easily affordable fines; and management has changed. The ghost of Marc Rich no longer haunts the company.
A stake in UK-based Glencore gives you a vertically integrated stake in virtually all major commodities through both trading activities and the company’s ownership of major mining properties and its direct marketing of the commodities it produces.
As the world’s largest commodities trading company, the company is a sure beneficiary of the rising value of commodities as well as of increased volatility in commodity markets. One impressive statistic is that company through its trading and marketing activity is responsible for delivery of more than 5% of the world’s oil.
Glencore has direct stakes in multiple mining projects, including in copper, coal, and cobalt. Not only does this give the company a direct interest in major commodities, it also adds to the company’s asset base, which is far greater than those of competing traders.
Its massive asset base virtually ensures gains in market share in trading, as underlying liquidity defines the amount of trading a company can manage.
If we are right and commodity prices continue to rise, it will create a virtuous circle in which growth in underlying assets provides the base for greater trading, while trading profits allow the company to acquire additional assets.
The most important metric in valuing any commodity company is free cash flow yield. For Glencore, that figure currently sits north of 20%, which means huge payouts to shareholders in the form of capital distributions and dividends.
The current bargain price is a result of the market taking its time in factoring in the recent settlement of the case against the company, which had been an overall depressant on the shares. Glencore now is positioned to be one of the strongest beneficiaries of the broad-based gains in commodity prices that lie ahead.
