Glencore sets aside $1.5bn for graft settlements after earnings surge on record commodity prices

Glencore CEO Gary Nagle. (Photo: Supplied)

By Sasha Planting

15 Feb 2022

Extraordinary commodity prices have delivered record profits, allowing Glencore to resolve all manner of lingering problems.

Mining and commodity trading company Glencore has delivered a record set of results, thanks largely to extraordinary commodity prices.

The healthy results provided the cushion CEO Gary Nagle needed to make provisions of $1.5-billion to settle bribery, money laundering and corruption claims that have been hanging around like bad smells since 2018 and dampening investor enthusiasm for the world’s largest commodity trading company.

Nagle, who took the reins in July 2021 after Ivan Glasenberg retired, has made it his mission to resolve this dragging issue. He is cleaning up the company, imposing new rules for ethics and compliance, and generally taming Glencore’s swashbuckling culture ahead of an era of greater shareholder activism.

Glencore CEO Gary Nagle. (Photo: Supplied)

“We recognise that there has been misconduct in this company historically,” Nagle told investors on a call on Tuesday to present the company’s preliminary results for 2021.

Despite the blow to net profit, the news of the provision was cushioned by the fact that the company plans to return $4-billion to shareholders – $3.4-billion via dividends of $0.26 per share, and the balance via a $550-million share buyback programme.

Nagle also recommitted Glencore – a company whose coal mines have been accused of releasing double the legal limits of methane into the atmosphere – to a 15% reduction in its carbon footprint by 2026, a 50% reduction by 2035 and net zero by 2050.

This includes a “responsible decline” in its coal portfolio, which is significant, particularly considering the fact that it recently acquired 100% of the Cerrejon coal mine in Colombia from partners BHP and Anglo American.

The company’s Climate Action Transition Plan will be put to shareholders for an advisory vote at the AGM in April this year.

In particular, Glencore’s results were supported by surging prices of coal and copper, which delivered the bulk of the profit. But the prices of cobalt, vanadium and nickel – all critical metals in the energy transition – also increased sharply in the financial year.

The company delivered an 84% increase in adjusted earnings before interest, tax, depreciation and amortisation, bringing these to $21.3-billion from revenue of $204-billion.

“Following Covid-19’s severe economic impacts in 2020, a recovery in demand, together with multiple supply side issues, resulted in generally significant inventory drawdowns and prices for most of our key commodities reaching multiyear highs,” Nagel said.

Full-year net profit was $4.97-billion compared with a $1.90-billion loss a year earlier – a remarkable feat considering that net profit was hit by the $1.5-billion provision relating to several investigations by authorities including the US Department of Justice, the US Commodity Futures Trading Commission, the UK Serious Fraud Office and the Brazilian Federal Prosecutor’s Office.

The improvement in the group’s financial results saw net debt reduce by 62% to $6-billion, allowing for healthy shareholder returns as the debt is well below the $10-billion cap set by the company.

Shareholders appreciated the strong results, which saw the share rise 2.61% to R88.04 on the day, a price that is 26% higher than it was six months ago. The share price closed at R87.25 on the JSE on Tuesday.

Unsurprisingly, Glencore is not alone in reporting strong results. Reuters reports that BHP Group announced a record dividend payout after reporting strong first-half profits on Tuesday, helped by higher commodity prices, despite a cutback in demand from top metals consumer, China.

“Elevated commodity prices have certainly assisted these commodity companies with robust cash generation,” says Reuben Beelders, portfolio manager at Gryphon Asset Management.

“On balance, I believe the cash generation at BHP is better than at Glencore. In my view, BHP has larger, better-quality assets and so should trade at a premium. Also, these are commodity companies – price-takers – so the operation with the largest assets will generally have the lowest fixed costs and hence the higher margins.”

BHP management has been reconfiguring the business quite dramatically. After spinning off “non-core” assets into South32 in 2020, they have recently sold their oil business to Woodside and are planning on investing significantly into its potash business, Beelders adds.

Last month, the company won shareholder support to unify its public holdings in a single Australia listing, a move which analysts say sets up the mining company to seek growth opportunities through acquisitions.

One of the targets, according to rumour and speculation, is Glencore. DM/BM

Categories:

Tags:

DM is much better if you are signed in...

Business Maverick