Glencore surprises with larger dividend but bumper profits disappoint

Glencore declared a $2.9bn dividend to be paid out in two equal instalments in 2018 as the commodities giant's much-improved balance sheet left it feeling more confident about the future.

The FTSE 100 commodities giant, which had already provided fairly detailed financial guidance and a production update in December and earlier this month, confirmed the numbers investors still awaited: two $0.10 dividends to be paid in May and September.

Adjusted earnings before interest, tax, depreciation and amortisation of $14.8bn in 2017 was 44% higher than the year before and bang in line its recent guidance. Revenue increased by a third to $205.5bn. Net profit after tax of £5.77bn was up more than fourfold from the year before.

Growth was driven by the highly cash generative marketing business and industrial assets. Strong cash flow generation led to a 49% increase in funds from operations to $11.6bn, while net debt fell to $10.7bn from $15.5bn over the year but the year end cash balance of $2.15bn was down from $2.51bn.

Marketing adjusted EBIT up 10% on a like-for-like basis to top $3bn for the first time since the financial crisis thanks to strong performances in metals and minerals and energy, allowing it to beat the $2.8bn guidance given in December.

The industrial business increased adjusted EBITDA 60% to $11.5bn as some minor production challenges during the year, were offset by healthy commodity prices and improved mine cash costs that saw strong margins. Looking to 2018, if current beneficial conditions continue the performance is felt likely to be in the upper half of the $2.2-3.2bn guidance range.

Chief executive Ivan Glasenberg said the performance was Glencore's strongest on record, helped by higher commodity prices combined with a continued strong unit cost performance.

"We look to the future with confidence," he said. "We believe our unrivalled positioning in 'Tier 1' commodities and 'Tier 1' assets will continue to create compelling value for all stakeholders." EBITDA and free cash flow for the new financial year were guided to $19.7bn and $9.6bn.

Further on the outlook for commodities, the company added that the "potential of synchronised global economic growth, emerging inflation, supportive commodity fundamentals and the emerging electric vehicle story suggest a positive outlook for commodities."

One recent blot on the outlook is in Africa, where "regulatory risk appears to be rising", said analysts at Morgan Stanley, with recent legislative shifts in South Africa, Tanzania and the Democratic Republic of Congo.

REACTION

Glencore shares moved higher in early trade, but up less than 1% to 387.2p.

Morgan Stanley said the numbers were "a modest miss" versus its estimates, though they were in line with the consensus, and the dividend was not far from its 20.7p forecast.

"Guidance increased but is below our estimates, driven by lower EBITDA from coal as price discounts seem to be higher than we expected."

Glencore’s free cash flow yield "looks attractive" at 9.7%, rising to 14% in 2019 versus the weighted average of the London listed diversified miners at 10% and 13%. "However, that partly reflects the very significant contribution of the African copper operations with EBITDA $2.9bn and $4.4bn in 2018 and 2019 (out of $21 and $23bn in total) where regulatory risk appears to be rising."

Pre-tax profits of £6.9bn were, felt analyst Yuen Low at Shore Capital, slightly short, as while revenues were significantly higher, cost of goods sold was also up by a similar proportion, while a $5.0bn increase in working capital meant that net operational cash generation was essentially flat at $4.8bn.

He said the balance sheet was "much improved", with net debt down and current assets up to $49.3bn from $43.4bn and current liabilities holding essentially steady at $44.3bn, which was leading directors to recommend the large distribution.

"This is effectively $1bn plus circa 36% of industrial asset free cash flow, significantly higher than the current dividend policy of a minimum of $1bn plus 25% of industrial cash flows. It is also significantly above that which we had been expecting - although CEO Ivan Glasenberg apparently told the press that there remained 'room' for M&A."