JOHANNESBURG (miningweekly.com) – Research analysts have sprung to the defence of Glencore, which has rapidly restored confidence by announcing an immediate share buyback programme that communicates the formidable faith of management in the London- and Johannesburg-listed diversified mining and marketing company.
In a note declaring the $1-billlion buyback “a welcome development”, Barclays Capital equity research analysts Ian Rossouw, Amos Fletcher and Kennedy Nyangoni state that "it signals management’s confidence”.
“We see today’s announcement as a positive,” Goldman Sachs equity research analysts Eugene King and Abhinandan Agarwal state.
"The buyback is in addition to the existing dividend policy. We're forecasting a total 2018 dividend of $3.9-billion for a yield of 6.1%, with this share buyback taking the theoretical shareholder return to 7.7%," BMO Capital Markets analysts Edward Sterck and David Gagliano calculate.
“There are a number of reasons why this should be supportive,” says Credit Suisse, which emphasised earlier this week that the step taken by the US Department of Justice (DOJ) was “a simple request for documents, rather than an announcement of a formal investigation”. One report stated that the documentation covered activities dating back to 2007.
However, in the face of the DOJ request and a court in the Democratic Republic of Congo (DRC) suspending a lawsuit hearing, the share price of Glencore tumbled the most in two years.
Now, the company has hit back firmly, with the first rapid-fire portion of the buyback programme beginning today and representing 1.6% of market capitalisation, which “suggests management also believes the recent price moves are extreme”, analysts observe.
The price of Glencore's shares rose 3.62% in Johannesburg before midday as Citigroup Global Markets began conducting the two-stage buyback programme, with the first stage to £350-million ending not later than August 7, a day before Glencore's half-year results announcement.
Under irrevocable instructions, Citi will take share trading decisions independently until the second part of the buyback scheme, when share trading decisions may be undertaken by Citi in accordance with the directions of the company.
In February, Glencore shot the lights out with a superlative set of 2017 results that coincided with a leap in its share price in Johannesburg, the reaffirmation of South Africa as an even more positive investment destination, and the mulling of a dividend "top up" later in the year.
Credit Suisse, which last week declared Glencore as the standout diversified mining and marketing company and its top pick, reiterated its outperform rating of the company, which it described as having a strong balance sheet and equally strong cash flow generation.
“We think there’s the possibility for a small upgrade to the buyback programme at the upcoming results on August 8,” Credit Suisse analysts Samuel Catalano, Conor Rowley, Michael Shiaker and Alexandr Ryumin forecast.
“We believe Glencore has a significantly stronger growth profile than its peers and also has free cash flow yields well above the other majors. A concern for some investors has been that this cash will never be returned to shareholders and instead be rechanneled into perpetual growth and mergers and acquisitions (M&A). Today’s announcement shows in itself this is not true but also brings pro forma net debt closer towards the company’s self-appointed upper net debt limit of $16-billion, which should diminish the likelihood of any major M&A activity over the next six months,” they say.
They expect Glencore, led by CEO Ivan Glasenberg, to deliver a 7% volume compound annual growth rate over the next three years.
“Our analysis suggests that Glencore has the strongest internally driven volume and earnings growth and also the largest proportional cash flow capacity should it choose to flex the balance sheet to add organic or inorganic growth for the next phase,” the analysts add.
Earlier this month, news service Bloomberg reported that Glencore was setting its ambitions on expanding in South Africa, where it is reaping rewards from the rising prices of thermal coal, chrome and ferrochrome and where it is looking to acquire Chevron Corporation's oil refining and fuel service stations.
"Glencore is currently generating lots of cash. Its coal business, one of the biggest in the world, is currently making huge profits on high prices," the Financial Times reported on Thursday.