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Why Are Glencore Shares Cheap?

VIDEO: Mining giant has done well from the coal boom but Morningstar analysts think the shares are undervalued

James Gard 10 January, 2022 | 10:48AM
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James Gard: Hello, I'm James Gard. A Happy New Year from me and the rest of the Morningstar team. Each week, we look at one stock that is cheap or expensive and why. This week is the turn of mining giant Glencore, which has a 4-Star rating from Morningstar.

Glencore extracts commodities from the ground and transports them around the world, but it also makes money from trading and marketing its products. Copper, coal, nickel and silver have all been in demand as the world economy revised. China is the biggest consumer of coal and copper in the world, and these products are big earners for Glencore. Coal has recently hit record highs amid supply shortages and rising demand. Glencore makes around 100 million tons of coal every year, the majority of which is thermal coal. This is used to fuel power stations in places like China and India, where environmental rules are less strict. So, Glencore is not necessarily going to feature on an ESG investor's radar.

Why do our analysts think the shares are undervalued? Glencore has shown its ability to profit from volatile commodity prices, they say, and its trading arm gives it a competitive advantage. The company's portfolio is also well diversified with exposure to in-demand metals like nickel, cobalt and copper. Morningstar analyst Mathew Hodge assigns the shares a fair value of £4.60, but the shares are currently trading below £4.

For Morningstar, I'm James Gard.

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James Gard  is content editor for Morningstar.co.uk

 

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The Morningstar Star Rating for Stocks is assigned based on an analyst's estimate of a stocks fair value. It is projection/opinion and not a statement of fact. Morningstar assigns star ratings based on an analyst’s estimate of a stock's fair value. Four components drive the Star Rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s fair value, (3) our uncertainty around that fair value estimate and (4) the current market price. This process culminates in a single-point star rating that is updated daily. A 5-star represents a belief that the stock is a good value at its current price; a 1-star stock isn't. If our base-case assumptions are true the market price will converge on our fair value estimate over time, generally within three years. Investments in securities are subject to market and other risks. Past performance of a security may or may not be sustained in future and is no indication of future performance. For detail information about the Morningstar Star Rating for Stocks, please visit here

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