Morning Note: Market news and an update from Glencore.

Market News

The yen tumbled past 147 after Bank of Japan Deputy Governor Shinichi Uchida pledged to refrain from raising rates if markets are unstable. Recent moves have been “extremely volatile” and the central bank needs to keep policy easy for now, he said in his first public remarks following the market rout. He said later he personally believes there are now more reasons to be careful about hiking rates.

The comments set off risk-on moves, highlighting how eager markets are to hear a dovish tone from central bankers, MLIV said. Japan stocks gained (Nikkei 225, +1.2%), leading Asia equities higher (Hang Seng, +1.2%; Shanghai Composite, +0.1%). European and US futures also climbed (S&P 500, +0.7%; Nasdaq, +0.8%). The FTSE 100 is currently trading 0.7% higher at 8,080.

Treasuries fell, with the 10-year yield rising to 3.91%. Usage of the Federal Reserve’s reverse repo facility dropped below $300bn for the first time since 2021 amid a resurgence in bill supply. The Bloomberg dollar index rose, with Sterling trading at $1.2692 and €1.1618. Gold held steady at $2,390 an ounce, while Brent Crude is $76.40 a barrel.

Vice President Kamala Harris picked Minnesota Governor Tim Walz as her running mate for the presidential election. The two are now embarking on a visit to key swing states with rallies scheduled in Wisconsin, Michigan, Arizona, and Nevada. NPR polls now show Harris leading Trump 51% to 48%.

Drugmaker Novo Nordisk cut its profit forecast for the year as its blockbuster weight-loss drug Wegovy quarterly sales number disappointed. Operating profit will grow 20% to 28%, slightly weaker than previous forecast. The shares are currently down 5%.

Source: Bloomberg

Company News

Glencore has this morning released first-half results which were below market expectations. However, following shareholder consultation, the company has decided to retain its coal and carbon steel materials business. As a result, the timing of shareholder returns is likely to be sooner than if the business was demerged. In response, the shares are little changed in early trading.

Glencore is a vertically integrated commodities business, with a strong position in the production of copper, 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.

Glencore’s acquisition of a 77% interest in Teck’s steelmaking coal business (EVR) for $6.9bn in cash completed on 11 July. The remaining stake is owned by Nippon Steel (20%) and POSCO (3%). The assets will complement Glencore’s existing thermal and steelmaking coal production located in Australia, Colombia, and South Africa. The company believes global population growth, increased urbanisation, and a growing middle class should continue to drive long-term demand for steel and the steelmaking coal required to produce it.

Following consultation with its shareholders, Glencore has decided to retain its coal and carbon steel materials business rather than demerger it. The company believes the expected cash generative capacity of the business significantly enhances the quality of the overall portfolio, by commodity and geography, and broadens the company’s ability to fund its strong portfolio of copper growth options as well as accelerate shareholder returns. The company will continue to oversee the responsible decline of its thermal coal operations in line with its current targets.

Now to the results. Against the backdrop of lower average prices for many key commodities, adjusted profit (EBITDA) fell by 33% to $6.3bn, below the market forecast of $6.8bn.

The Industrial assets’ EBITDA fell by 39% to $4.5bn, primarily driven by a $2.7bn lower contribution from the coal operations, owing to the substantial average period-over-period declines in key thermal coal pricing benchmarks. The group has maintained its full-year production guidance, with production expected to be second-half weighted.

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. In the first half of 2024, the unit generated adjusted profit (EBIT) of $1.5bn, down 16%, tracking on an annualised basis at $3.0bn. The lower energy contribution, reflecting prior period elevated volatilities, was partially offset by a strong metals performance.

Viterra is the group’s agricultural commodity trader, in which it has a 49.5% stake. In June 2023, Glencore agreed to dispose of its interest in a cash and shares transaction with industry rival Bunge. The merger will create a diversified global agribusiness solutions company with significant synergy and re-rating potential. Under the terms of the agreement, Glencore will receive 32.8m Bunge shares (or 15% of the new company), currently worth c. $3.1bn, and $1bn in cash. The merger, which remains subject to regulatory approvals, is expected to close within the next several months.

Capital expenditure grew by 15% in the first half to $2.9bn. Guidance for the next three years is an average of $5.7bn p.a. The company is looking at greenfield mine developments, although these projects will only be approved when the market requires the commodity (and prices are higher) or when existing projects are completed.

Funds from operations rose by 9% to $4.0bn, due to the timing of income tax payments. Net borrowing fell from $4.9bn to $3.6bn, with gearing a comfortable 0.26x net debt to EBITDA.

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. For 2024, based on 2023 cash flows, the group will pay 13c per share (c. $1.6bn) base cash distribution, comprising $1bn from Marketing cash flows and 25% ($0.6bn) of Industrial attributable cash flows. 50% of the dividend was paid on 5 June.

Following the decision to retain the coal and carbon steel materials business, the group’s net debt cap shaping its shareholder returns framework has been reset at $10bn. When net debt falls below $10bn (after the base distribution), cash will be periodically returned to shareholders via special cash distributions and/or share buybacks as appropriate. Since 2020, the group has announced $10.3bn of “top-up” returns. Once the second half outflows have been considered, including $6.9bn for Teck EVR acquisition, Glencore only needs to deleverage by $0.3bn to reach the $10bn net debt cap.

In addition, the business is expected to be highly cash generative at current spot commodity prices – annualised free cash flow generation (including Teck EVR) would be $6.1bn (10% FCF yield) from adjusted EBITDA of $17.3bn. The company says this augers well for potential top-up shareholder returns, above the base cash distribution, in February 2025.

Source: Bloomberg