Investor Tribeca presents Glencore with ideas to raise shareholder value

Business: Based in Switzerland Glencore PLC produces and markets a diverse range of metals and minerals, including copper, cobalt and zinc. It also markets aluminum/alumina and iron ore from third parties. The company is a producer and marketer of coal, with mines in Australia, Africa and South America. Glencore also markets crude oil, refined products and natural gas. The company physically sources raw materials and products from its global supplier base and sells them to customers around the world, transporting raw materials by sea, rail and truck. Additionally, Glencore is involved in the recycling of copper and precious metals.

Stock market value: ~53 billion pounds (4.35 pounds per share)

Ownership percentage: n / A

Average cost: n / A

Comment from an activist: Tribeca Investment Partners is a specialist active investment and advisory firm with offices in Sydney, Melbourne and Singapore. The company was founded in 1999 by Tribeca Chairman David Aylward. Tribeca leverages its multi-asset class expertise in equities, credit and natural resources, and offers a range of services to its clients in the areas of asset management, wealth management private sector and business consulting. Although not explicitly activist, Tribeca is willing to engage its portfolio companies to improve shareholder returns and corporate governance.

On March 13, the Financial Times reported that Tribeca had sent a letter to Glencore’s board, calling on it to (i) transfer the company’s primary listing to the Australian Securities Exchange from London; (ii) increase dividends by stopping share buybacks; (iii) split its commercial division; and (iv) maintain control of its coal operations. Tribeca has been a shareholder of Glencore for seven years and has been engaged with management for the past year.

Glencore is a Swiss-registered diversified mining company operating in more than 35 countries, primarily engaged in the production and marketing of metals and minerals, energy resources and commodity trading. The company has excellent core assets in copper, zinc and coal, as well as a world-leading commodities trading business. Consensus projections for FY25 estimate Glencore’s earnings before interest, tax, depreciation and amortization to be about 25% copper, 18% commodity trading and 18% metals. coal, 17% to thermal coal, as well as 22% to zinc, nickel, alloys and others. Despite its core asset quality, strong financial position and excellent management team, Glencore has generated a total shareholder return of 36% since listing on the London Stock Exchange in May 2011, a profound underperformance by compared to its peers BHP (+295%) and Rio. Tinto (+218%). Furthermore, despite a quadrupling of EBITDA, Glencore’s enterprise value increased by only 15% and suffered continued devaluation from a peak EV/EBITDA of 11.5 times in the early years. 2010 to five times today.

Glencore has had a fluctuating relationship with its coal operations for several years. Given its London listing and the general attitude of ESG-minded investors across Europe, there is a continuing climate of hostility towards fossil fuels. Bluebell Capital Partners has notably pushed for a spin-off of Glencore’s thermal coal business in 2021. CEO Gary Nagle pushed back, saying a 30-year look at the company’s mining operations was a wiser strategy. However, in 2023, after acquiring a 77% stake in Teck’s coal steelmaking business, Glencore announced plans to split its combined coal and carbon steel businesses. Tribeca thinks it won’t start. From a financial perspective, the company believes the coal business generates strong and stable capital returns within the otherwise cyclical earnings profile of its heavy metals portfolio and is expected to generate a diversification premium. Tribeca notes the transition of the ESG movement in recent years and wisely argues that part of this transition is that it is better for fossil fuel companies to be in the hands of responsible managers who will attempt to optimize ESG factors rather than disinvesting in a sector of activity. owner who does not take these factors into account in his operations.

Tribeca is also making a strong case for re-listing the company in Australia from London, believing it would accelerate net inflows and provide an option for corporate activity. The firm says London is no longer the home of the mining sector, attributing just 7% of market capitalization to the mining sector, compared to 16% for the ASX. Additionally, London is home to virtually no coal mining companies and valuations for diversified mining operations are significantly higher on the ASX. Tribeca makes several excellent arguments regarding Australia’s appetite for dividends, copper and Glencore’s increased ability to make equity-based acquisitions in Australia. However, Tribeca’s citation of similar actions taken by its peers is even more compelling. When BHP collapsed its dual-listed structure under an Australian parent company in 2022, Tribeca initially opposed the move, but eventually saw the benefits as BHP erased the 20% discount adjusted for currencies between its shares listed on the LSE and the ASX. and increased its forward EV/EBITDA multiple from less than four times to nearly six times. More interestingly, Rio Tinto – which remains dual-listed – continues to see its London-listed shares trading at a significant discount to those traded in Australia. Tribeca estimates that a move to the ASX could add $13 billion (US) to Glencore’s market capitalization.

Regarding dividends, Tribeca highlights that its peers BHP and Rio have maintained dividend payout ratios of between 60% and 80% between 2018 and 2022, compared to 30% for Glencore. Despite initiating share buybacks – something none of its peers have done in the past four years – Glencore’s share price has lagged. Tribeca believes this is because natural resource investors favor real returns on capital over artificial inflation of earnings per share. This, coupled with the incorporation of franking credits in conjunction with an ASX listing, would make the company very attractive to Australian retail investors and superannuation funds and continue to close the valuation gap.

Tribeca is also calling for a minority sale of its business operations, which are a world-class operation and boast an unrivaled return on invested capital, but are currently lost in diversification. This is a somewhat tricky question as the trading industry has so many positives and negatives that it is difficult to know exactly what a sale would do for Glencore shareholders. On the positive side, cash flow from trading activities is crucial to the capital-intensive operations of the rest of Glencore and goes a long way to mitigating the downside of cyclicality. On the negative side, it is the letter of credit required by the trading activities that Tribeca attributes largely to Glencore’s underperformance. Tribeca discusses a possible solution that sounds more like a fantasy: selling 20% ​​of its trading business to Berkshire Hathaway at a multiple of 10 to 15 times (it currently trades at 4.8 times), which would hypothetically agree to use its balance sheet to maintain itself. behind the trade.

Tribeca is a long-term shareholder of Glencore and a friendly partner. It’s clear that the company has a lot of respect for management and is looking to work constructively to close the valuation gap. Tribeca’s detailed letter shows that the company has thought a lot about how to create shareholder value and is proposing many different paths. Tribeca understands that it is very unlikely that the company will follow all of its suggestions, but it is clear that Glencore should follow some of these recommendations to increase shareholder value. The simplest would be to keep the coal business: its sale would require a shareholder vote, and Tribeca believes that many shareholders and the company’s CEO are in favor of maintaining it. Tribeca has clearly stated that it is “open door” regarding discussions with major shareholders, including former CEO Ivan Glasenberg and senior management who collectively own 20% of the company.

The listing recommendation is not that simple. As part of the transfer of listing to the ASX, Tribeca is discussing a partial secondary listing in London or the NYSE and acknowledges potential issues regarding institutional investors and index ownership of the security. There is clearly more work that Glencore will need to do on this point before reaching a conclusion. The same applies to the sale of commercial activities. The question of dividends is quite simple, but to get the full value you would have to move from London to Australia.

Tribeca estimates that following its recommendations could result in an upside of at least 30% – and potentially more than 100% – from the stock’s current price. The cabinet makes compelling recommendations and we expect it to follow some of them. However, Tribeca bases much of its valuation on revaluations, multiple expansions, conjectures and speculation: the company has used words like “potential”, “implied”, “assume” and “forecast” more than what we are used to seeing in activist terms. letters. So while we think this is a well-crafted and reasoned activist campaign with significant upside potential, we take Tribeca’s high end with a grain of salt.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.