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Can Glencore’s [GLEN] share price withstand ‘Project Caesar’ scandal?

Glencore [GLEN] has become a magnet for controversy. Secret lobbying, antitrust accusations and tax fines have seen the miner become a regular in the financial press.

One of the world’s largest companies, Glencore’s network covers commodities, shipping and trading. But as the scandals mount, it’s starting to look like the share price could come under pressure.

 

Project Caesar

Revelations have emerged that Glencore secretly bankrolled a ‘pro coal’ lobbying campaign. Codenamed “Project Caesar” and orchestrated by the C|T Group, the campaign commanded a budget of up to $7 million to paint coal in a more favourable light compared to other energy sources. This directly contradicted Glencore’s publicly stated goal to reduce coal consumption.

It’s a strange time in coal. China has restricted imports and an Australian court cited coal as a factor in climate change. Glencore has itself committed to capping production in the face of activist pressure.

Yet, the self-imposed 150 million tonne cap is, in reality, a rise on last year’s production figure of 130 million. 2019 will see the company raise coal production 12% to 145 million tonnes.

12%

Glencore's expected increase in coal production for 2019

Then there are the other scandals Glencore’s PR team are dealing with right now. Under the spotlight are oil deals in Venezuela and Nigeria that have come to the attention of US regulators. British authorities have slapped a $680 million tax demand fine on the miner. And last week antitrust agents in India raided Glencore offices looking for evidence of price collusion.

The risk is that the constant flow of bad press will give nervous investors a reason to sell the stock.

 

2018 results disappoint

Unquestionably, Glencore’s full-year results disappointed with an EBITA of $15.77 billion missing the $16.23 billion consensus estimate.

Glencore’s trading unit posted its worst profit in five years, missing both analyst expectations and its own forecasts from two years ago. This will have been a disappointment for the company that has touted its traders’ ability to make money in any market.

 

Market cap£42.64bn
PE ratio (TTM)12.94
EPS (TTM)24.00
Return on equity (TTM)5.52%

Glencore stock vitals, Yahoo finance, as at 18 March 2019

 

Debt also rose to $14.7 billion from $10.2 billion. This will worry investors who have been led to believe the company’s focus is now on cutting debt. Unsurprisingly, shareholders want the miner to curb its expensive acquisitions. These have included the $1.2 billion spent acquiring Rio Tinto’s coal operations. Moves to reassure investors include a $2 billion share buyback and reassurances that $1 billion worth of non-performing assets will be cut.

Glencore has also recently cut copper production at a mine at Mutanda Mining Sarl Congo. This will reportedly see 2,000 contract workers laid off as Glencore seeks new mining methods at the mine.

 

Is there opportunity in Glencore’s share price?

Despite this year’s scandals, the share price has so far proven resilient. Since the start of the year, the stock has managed to climb 8% to trade around the 305 level. Going back further, however, the share price is down 23% and well off the 411 high seen in January 2018.Glencore 1-year share price performance, CMC Markets, as at 18 March 2019

 

Traders interested in the stock will need to watch out for volatility. Mining can be a fast moving sector so news that Glencore is more volatile than its rivals will concern cautious investors. According to Simply Wall St. the stock’s 1.59 beta is well above the industry’s 5-year 1.33.  

One future headwind is the slowdown in the Chinese economy. China’s maturing economy is seeing a shift from capital spending towards consumer spending which could reduce demand in commodities. Another headwind is the US Federal Bank rising interest rates. Any hike could see the dollar rise in value leading to a drop in price for commodities coming out of emerging markets.

In any case, Glencore will be hoping that its business model is strong enough to mitigate further blowback from recent scandals. There is only so much negative news that any company’s stock can take.

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