JOHANNESBURG (miningweekly.com) – Diversified miner Glencore’s strong production growth has prompted investment banking and management firm Goldman Sachs to maintain its buy rating on Glencore.
Glencore’s portfolio includes copper, zinc and cobalt operations and these metals are likely to gain traction on the back of increasing electric vehicle penetration.
Goldman says zinc remains the most preferred commodity, based on its strong fundamentals and the deficit in the market. “Prices have continued to surprise to the upside and, given the strong demand from China, they could continue to do so,” stated the firm.
Additionally, copper is one of the most preferred commodities in the broader commodity complex. Copper is forecast to remain in a deficit in the near future, with ongoing wage talks in Chile presenting an upside risk to Goldman’s forecasts.
Goldman is also confident in Glencore’s return potential, stating that Glencore is generating significant free cash flow compared with its peers. Goldman expects Glencore to have an average free cash flow yield of 14% over the next four years.
Goldman says significant growth is around the corner for Glencore. In September 2015, Glencore decided to shut down its Katanga mine, curtail production at Mopani – in the Democratic Republic of Congo and Zambia, respectively – and also scale back zinc production at its Mount Isa and McArthur River operations, in Australia, in light of lower prices.
“As a result, we believe Glencore has significant optionality with regard to
volume increases. The most notable include bringing back shuttered zinc capacity in
Australia, which is about 5% of world zinc production, in a phased manner; bringing back about 450 000 t of shuttered copper production from Katanga and Mopani; and bringing back about 30 000 t of shuttered cobalt production from Katanga and Mopani.”
Now that cobalt prices have rallied significantly, Goldman believes the company will look to ramp up production, albeit in a phased manner so as to not push prices lower.
Another positive for Glencore is the cobalt by-product credit it will get from Katanga and Mopani which makes the mines very profitable and low cost.