2016 Case study: Glencore Plc

Case Study

This article is a recap and case study of the first official investment idea that Reid Green & Co published after its inception in April 2016: Glencore Plc.

Glencore is a vertically integrated and vastly diversified producer, processor and marketer of over 90 different commodities and natural resources and they operate in over 50 countries.

Glencore Plc was a company we were looking at the peak of pessimism in oil market, when pundits such as Goldman Sachs were saying crude oil could go as low as $20 a barrel.

However after our own investigation of the company’s business model we were overwhelming impressed with the operation they had built. This is illustrated by this excerpt from the report we subsequently wrote on the stock:

I believe the way Glencore is organised gives it staying power throughout different market cycles. Their extreme diversification across the 90 difference natural resources they deal in, the 50 different countries they operate in and their 150 different industrial facilities give them unique protection against distress market conditions or catastrophe in any one country, region, and commodity type or business unit. 

This heavily established infrastructure is also hard for their competitors to copy, gives them huge economies of scale and grants them strategic flexibility in which business areas they can allocate capital to depending on which area offers the greatest return at the time.”

Although it was the fact that the company’s shares were trading at 50% below its book value and the announced restructuring plan that lead us to believe the shares were trading too cheap. This is demonstrated by another excerpt from our initial report:

“Glencore Plc currently has £41billion in net assets while it trades in the market for £19billion, which means they are trading for around 50% below what a private buyer might pay for the whole company. Over the next two years Glencore Plc are focusing their attention on carrying out a restructuring by reducing their net debt from $25billion down to around $17billion, they are divesting non-core assets and low return businesses and working to cut costs where they can. 

I think over the next 1-2 years these actions should increase the value of the business and reveal some of its current value. While this does not constitute a personal recommendation or investment advice, I rate Glencore Plc a good buy at this price and expect to exit when the market cap reaches its book value of around £40billion.” 

So on the 11th of April 2016 we published a report, giving a bullish case on why we thought the stock was undervalued.

What happened after we covered the stock?

Since we covered the stock, considered it undervalued and rated it a buy on the 11th of April 2016, it peaked on the 17th of March 2017 at 345p. This represents a 142% increase from our initial buy indication.

At the time of writing (16th June 2017) Glencore’s share price is & market capitalisation is 283p and £40 billion. This represents a 99% increase from our initial report a year ago when the share price & market capitalisation was 142p and £19 billion.

Our thesis on Glencore Plc was based on the company being able to decrease its debt load and restructure its business by divesting non-core assets and reducing its operating costs.

On February 23rd 2017 the company announced its preliminary 2016 full year results, which highlighted a number of points in line with our initial thesis:

  • Glencore reduced its net debt from $25 billion to $15 billion (better than it’s $17 billion target)
  • Generated more than $1.3 billion in cost savings across industrial asset portfolio
  • Successful programme to divest non-core assets, which delivered $6.2 billion in proceeds since Sept 2015

(Glenore’s preliminary 2016 full year results can be found here)

An Example of why Reid Green & Co focuses on Special situations

I believe the investment case above provides a good example of why Reid Green & Co seeks out special situations and corporate activity as a source of investment opportunity, instead of trying to predict general market prices or solely relying on forecasting business performance.

In the case of Glencore Plc we didn’t spend any time trying to model every single business unit or product line they had, or understand them individually and then try to predict their cash flows 5 or 10 years out.  Nor did we try to predict commodity prices.

Overall we knew they had built an incredibly sophisticated and hard to copy business operation, made up of dozens of valuable assets. From a investment perspective we know that any company which has staying power, reduces its operating costs, sells its least productive and least useful assets and uses the proceeds to pay down a large portion its debt in a short space of time, will be in a stronger financial position and become a more valuable company.  More over such a company shouldn’t trade at 50% of its net assets they way Glencore once did, if the assets are productive and are less encumbered by debt the way they once were.

Essentially the insight came from understanding and focusing on a special situation and corporate activity, not solely predicting business performance.

Instead of trying to know everything about everything at all times, Reid Green & Co trys to help its subscribers profit from the easy and obvious.

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  1. Isabella Bennett

    This is a very good illustration of your investment strategy on Glencore.

    However, I’m a short term trader, under normal circumstances I’m usually inclined not to hold stocks/shares for more than a month or two. If you do investment of that sort, I could be interested in following your advice.

    • reidgreenco

      Hi Isabella,

      Thanks for your feedback.

      For the most part we have a long term orientation. Our time horizons on an investment generally range from 6 months to 5 years. Having said that we occasionally trade around positions we know a lot about and other short term wrinkles in the market. We would be happy to send you alerts when we come across such opportunities, although it wouldn’t be very often as we focus on certainty as opposed to frequency.

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