Home Discount rate Structural changes for Glencor – GuruFocus.com

Structural changes for Glencor – GuruFocus.com

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Over the past 10 years, Glencore PLC (LSE: GLEN, Financial) underperformed its two main peers, Rio Tinto (LSE: RIO, financial) and Anglo-American (LSE: AAL, Financial). This is due to a terrible performance from 2018 to 2020 thanks to its coal exposure and investigations by the UK’s Ministry of Justice and Serious Fraud Office into regulatory and corruption issues.

This is also the period when environmental, social and governance analysis as an investment tool in Europe began to take hold. On May 24, Glencore announced a settlement of these investigations with US, UK and Brazilian authorities, with the aggregate value of the settlement expected to be in line with the previously disclosed $1.5 billion provision. I believe this announcement is the start of Glencore’s transformation from an ESG laggard to an ESG leader.

Many institutional investors have refused to invest in the company, but that may be about to change.

Glencore has identified decarbonisation as a key priority and has set ambitious targets to reduce scope 1-3 emissions by 50% by 2035 compared to the 2019 baseline (and by 15% by 2026) . The company reduced its Scope 1 and 3 carbon dioxide emissions by approximately 15% and 25% in 2021 (compared to the 2019 baseline).

The Swiss company has linked its capital allocation strategy to the achievement of its climate objectives. Glencore’s strategy is to harvest cash from its coal business and focus its investments on transition metals. Management has intensified this focus by simplifying the portfolio to prioritize larger, higher-margin assets that are critical to the energy transition. Since 2021, this has generated approximately $3 billion in proceeds from the disposal of non-core assets. The potential disposal of remaining non-core assets, some of which are in the process of being sold, has another benefit.

Glencore’s capital expenditures are heavily focused on energy transition metals, including various South American copper projects, African copper and cobalt, polymetallic investments in Kazakhstan and nickel projects in Canada. In 2021, industrial capital expenditure was $4.4 billion, of which $724 million, or 16%, was coal-related. The currently approved investment program for the coal business is limited to capital expenditures for maintaining operations and extensions of existing mines.

Another important ESG topic is employee health and safety performance. Glencore has a poor safety record, with 119 fatalities recorded in its operations since 2013, including eight in 2020 and four in 2021. Most of these fatalities are linked to its operations in the Democratic Republic of Congo, Zambia (the Zambian asset was sold in 2020) and Kazakhstan. While any death in a mining operation is a tragedy, Glencore has made great strides in reducing the number of fatalities in its operations over the past few years. This has included management’s renewed emphasis on safety and a strategy of selling lower quality assets, which in many cases carry higher ESG risks. As a result, the number of fatalities has been reduced to four in 2021 and two so far in 2022. Glencore’s Total Recordable Injury Frequency Rate and Lost Time Injury Frequency Rate have also decreased significantly. constant over the past five years.

Recycling

A key competitive advantage of Glencore over its peers is its exposure to recycling. By recycling copper, nickel, cobalt, zinc and other precious metals, the company contributes to the circular economy, diverts materials from landfills and reduces environmental impacts.

As one of the world’s largest processors of secondary materials containing nickel and cobalt, in 2021 its nickel recycling business processed 17,900 tonnes of recycled materials containing 4,400 tonnes of nickel (4%), 1 500 tons of cobalt (5%) and 900 tons of copper. Recycling has the added benefit of using far less energy than mining and smelting the primary metal.

Although overall volumes are still low relative to group production levels, Glencore is uniquely positioned as the only large diversified mining company with a significant metallurgical processing asset base to develop the recycling activity with increasing emphasis on the recovery of forward-looking raw materials.

Climate

Glencore is the only diversified miner with targets aligned to the Paris Agreement on a total emissions basis by 2035, as other diversified miners are generally only aligned on a scope 1 and 2 basis.

The company’s strategy focuses on three areas: efficient operations, refocusing its portfolio towards forward-looking raw materials such as nickel, copper, cobalt and zinc, and its responsible decommissioning plan. of its coal production over time.

Glencore is exploring opportunities to increase the proportion of green metals it can supply to its customers from its own mines and through its extensive marketing (commodity trading) activities. As part of this initiative, the company is also strengthening its power and carbon trading teams to help deliver carbon solutions for commodity supply chains as these markets evolve and mature. In the race to net zero, this is a rapidly growing service that industrial companies will need from Glencore.

Other ESG-friendly initiatives

In February, Glencore partnered with Century Aluminum Co. (CENX, Financial), in which it holds a minority position, to start supplying Natur-Al aluminum to customers. This aluminum has been specially designed to have one of the lowest CO2 footprints in the world for metal.

Glencore also teamed up with BritishVolt earlier this year, announcing a battery recycling joint venture. Recycling will take place at its Britannia Refined Metals plant in the UK. The facility is expected to be operational by mid-2023, with a long-term goal of being powered by 100% renewable energy.

Finally, by this time next year, the company will have completed compliance with the new global industry standard for tailings management, prompted by the Global Tailings Review, a safety initiative overseen by the International Mining Council. and metals, the United Nations Environmental Program and the Principles for Responsible Investment.

The risks associated with Glencore’s tailings storage facilities are relatively high, given that it has 22 upstream dams, which is a significant number even for a large mining company. By aligning tailings storage facility management with global industry best practice, institutional investors can tick another box in Glencore’s investment case.

New technologies

Before digging deeper into the business, I had always assumed that Glencore was behind Anglo and Rio on the technology front. But I have to erase this view.

Glencore is building next-generation, low-emission nickel mines in Canada. The Onaping Depth mine will consist of a fleet of all-electric vehicles with real-time remote operation, monitoring and management using advanced Wi-Fi systems. Benefits include eliminating diesel emissions, reducing ventilation and reducing noise pollution. The company expects to reduce greenhouse gas emissions by 45% compared to a similar mine equipped with diesel-powered vehicles. Glencore plans to commission these assets by 2024-25.

The Carbon Transport and Storage Enterprise project, wholly owned by Glencore, aims to demonstrate carbon capture and storage technology that will enable its customers and other users to better manage and reduce their emissions. This is planned for the coal-fired Millmeerran power station in Queensland and will be one of Australia’s most advanced onshore CCS projects. A final investment decision on the project is expected later this year.

Conclusion

Glencore’s ESG improvement should lead to a revaluation of the stock, as the market applies a lower discount rate to valuations, as it better understands the lower risks the company faces. Its recycling business is a real differentiator from its peers, and its unique marketing business also underpins the dividend.

Coal assets are likely to generate generous free cash flow in the era of Russian sanctions, which can be reinvested in forward-looking commodities that ESG-focused institutional investors value more.