RBC uncertain on Glencore investment following subpoena

Glencore was hit on Tuesday with a subpoena from the DoJ which requested it produce documents and other records related to its activities in Nigeria, the Democratic Republic of the Congo and Venezuela dating from 2007 to present.

"The subpoena drives more uncertainty into the Glencore investment case, which we find compelling from a valuation perspective, but increasingly challenged from a headline risk perspective," RBC said.

While the Canadian broker noted there was not enough detail in the release to understand exactly what the investigation was centred on, given that it covered multiple countries, it would indicate that there was a "relatively thorough investigation" taking place.

Investigations under the banner of the Foreign Corrupt Practices Act generally result in sanctions, fines and penalties of up to $25m or twice the gain or loss caused by the violation and imprisonment for up to 5 years for each breach.

"After navigating the recent challenges in the Congo, albeit with a jurisdictional shift in risk from the Congo to the US, this investigation is likely to provide another reason for investors to proceed with caution around the Glencore investment case," said RBC's analysts.

For now, RBC left its 'outperform' rating and 410p target price on Glencore unchanged.

Yet from a valution perspective, RBC conceded that the investment case was "compelling", with the company's shares "cheap", as they were trading at only 3.4 times spot EV/EBITDA, whereas its peers were changing hands at 5.0 times (excluding Congo).

"We continue to prefer the relative commodity mix over what we see as a volatile coming 6 months for the sector," RBC also said, adding that the investigation was likely to feel "less acute in due course", although "this might take some time to occur with what has been a wave of challenges facing the company."

"We would expect that Glencore will use all legal means to defend itself and would highlight that there are no formal charges at this stage."

RBC stuck to its 'outperform' recommendation and 410p target price on the stock.