Morning Note: Market news and an update from Glencore.

Market News

Oil slipped (to $88 a barrel) with gold (to $1,994 an ounce) and government bonds – the 10-year currently yields 4.84% – as demand for haven assets eased after Israel’s military action in Gaza proceeded more cautiously than had been anticipated while investors continued to look to the Federal Reserve for direction on interest rates.

This morning Asia, equity markets were mixed: Nikkei 225 (-1.0%); Hang Seng (-0.1%); Shanghai Composite (+0.1%). Japan’s 2-year note auction drew its lowest bid-cover ratio since 2010 in a sign investors see a BOJ tweak on the horizon. The S&P Futures are currently predicting a 0.6% rise at the UA open this afternoon.

The FTSE 100 is currently trading 0.4% higher at 7,330. Sterling $1.2092 and €1.1461. HSBC announced a $3bn buyback program after quarterly profit missed as costs rose. The bank also said it is setting aside more funds for possible losses in China’s commercial property sector after warning of the risk of a further deterioration.

The UAW expanded its strike against GM, now the only Detroit automaker without a deal with the union. Workers walked out of plants in Tennessee on Saturday. Earlier, Stellantis reached a tentative accord to end a six-week strike, following Ford’s lead.

Source: Bloomberg

Company News

Glencore has this morning released its third quarter production report. Although performance was described as ’solid’, guidance has been lowered in two commodities. However, guidance for the marketing business was reiterated. In response, the shares up 1% and still trade on a discount to the peer group.

Glencore is a vertically integrated commodities business, with a strong position in the production of copper, thermal coal, nickel, zinc, cobalt, and precious metals, and a unique marketing business which markets and distributes commodities sourced from internal production and third-party producers to industrial consumers. The group’s strategy is to own large-scale, long-life, low-cost Tier 1 assets. Glencore is a leading producer of metals that are used in low-carbon and carbon-neutral technologies, such as electric vehicles and renewable energy, the outlook for which is underpinned by robust demand and persistent long-term supply challenges. The IEA estimates that by 2050 the metals requirement for clean energy technologies will amount to 2.1x-3.4x more copper than in 2020, 10.8x-30.1x more nickel, and 9.9x-32.9x more cobalt. Given the industry’s supply constraints, the group is also increasing its investment in recycling and circularity.

Earlier in the year, Glencore announced plans to merge with Teck, one of Canada’s leading mining companies with operations throughout the Americas focused on copper, zinc, and steelmaking coal. The move would see the creation of two separate companies – MetalsCo and CoalCo – and generate substantial synergies. Following local opposition to the deal, Glencore also submitted an alternative bid to only acquire Teck’s steelmaking coal business (EVR) for cash. Glencore’s intention is still to demerge CoalCo with 12-24 months. If the EVR deal doesn’t happen, management would consider shareholder feedback to decide whether to retain its coal assets and run them down over time or spin them out.

This morning, the group has outlined production performance from its underlying base business over the first nine months of the year. The key copper, coal, and zinc assets performed in line with expectations and previously communicated guidance. However, Nickel and Ferrochrome have been lower.

Own sourced copper production of 735,800 tonnes was 5% than last year reflecting the sale of Cobar in June 2023 and lower copper by-product production outside the Copper department. Own sourced zinc production of 672,100 tonnes was 4% lower than last year, mainly reflecting disposals and mine closures. Coal production of 83.9m tonnes was broadly in line with last year.

Nickel guidance has been reduced by 9% to reflecting a longer than expected recovery period following the extended Raglan strike action in 2022, maintenance outages at the Sudbury smelter. and a lower full-year revision for Koniambo. Production so far this year is down 16%. Ferrochrome production has also been marked 8% lower, due to additional smelter off-line days on account of electricity pricing and load curtailments in South Africa, however chrome ore mining production is expected to only be modestly below 2022 levels.

Glencore’s marketing business exploits arbitrage opportunities that continuously emerge in commodity markets. It provides a good hedge against commodity price volatility and finances the $1bn base dividend (see below), although clearly there is always a risk of potential losses because of that volatility. The group continues to expect a full-year adjusted EBIT outcome above the top end of its $2.2bn-$3.2bn p.a. long-term guidance range, with a likely outcome within the previously communicated $3.5bn-$4.0bn range.

There was no update on the group’s financial position with today’s statement. At the last balance sheet date (30 June), net borrowing was only $1.5bn, well below the group’s $10bn optimal level. This leaves the company well placed to pay out significant shareholder returns. The dividend policy is to pay a fixed $1bn base distribution from the Marketing business, reflecting the resilience, predictability, and stability of the unit’s cash flows, plus a minimum payout of 25% of Industrial free cash flow. Where net debt falls below the $10bn cap (after the base distribution), cash will be periodically returned to shareholders via special cash distributions and/or share buybacks as appropriate.

At the half-year stage, the group announced an additional “top-up” payment of $2.2bn split between a $1bn (8c/share) special cash distribution and a new $1.2bn share buyback programme intended to run until 2024. The special cash distribution of 8c was paid on 22 September alongside the 22c/share second tranche of the cash distribution announced last February. This takes the total distribution this year to $9.3bn or 14% of the market cap. The group has also held back $2bn of cash for M&A – if a deal with Teck doesn’t occur, the company has said this would be made available to shareholders.

Source: Bloomberg