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Glencore’s (LSE: GLEN) share price has been in a bullish trend since early April. Specifically, it has jumped around 47% from the 7 April £2.36 opening price to £3.46 now.
The key underlying reason was the US announcement of wide-ranging tariffs on multiple products. This caused an increase in the price of several commodities used in the manufacturing process.
Additional bullish price pressure has come from commodities-specific imbalances in supply and demand. A case in point was the Democratic Republic of the Congo’s temporary ban on cobalt supplies earlier this year. It is the world’s largest producer of the metal. This was subsequently replaced by a strict export quota system.
The upshot is that the price of coal, copper, and cobalt have, respectively, increased by 11%, 27%, and 45% since April.
Global mining and trading giant Glencore is a major player in each of these commodities.
So is there any value left in the stock?
A share’s value is different from its price, with the two measures rarely being in balance. And it is in that difference that big long-term profits are to be made, in my experience. This includes several years as a senior investment bank trader and decades as a private investor.
Identifying this gap is so important because asset prices tend to converge to their ‘fair value’ over time. And this, in turn, is why it is so critical to have the right tool to accurately assess a stock’s true worth.
In my experience, the best method for doing so is the discounted cash flow valuation. This pinpoints the exact price at which any stock should trade, based on cash flow forecasts for the underlying business.
It also does so on a standalone basis. This means that it is unaffected by under- or over-valuations of the sector in which a firm operates.
The DCF for Glencore shows its shares are 16% undervalued at their current £3.46 price.
Therefore, their fair value is £4.12.
Sectoral and stock outlook
The driving force behind any firm’s share price (and dividends, where applicable) is its earnings growth. A risk to Glencore’s is an extended period of bearish pricing across all the key commodities in which it operates.
That said, consensus analysts’ forecasts are that the firm’s earnings will grow by a stunning 56% a year to end-2027.
I believe a key factor powering this will be its steelmaking coal firm Elk Valley Resources (EVR), acquired last July.
The strategic rationale was to secure ongoing supplies of the high-margin commodity that is critical for infrastructure, including renewable energy. Glencore sees this income as the optimal way to create shareholder value and fund growth in its transition metals portfolio.
Positively in this context, analysts forecast China should hit its 5% economic growth target this year. It is the biggest global buyer of steelmaking coal, accounting for 41% of world demand.
That said, even a 4.5% GDP expansion in China would be equivalent to adding an economy the size of India’s to its own every four years.
My investment view
Glencore is not for me, as I already have holdings in several commodities stocks. Another would destabilise the risk-reward balance of my overall portfolio.
However, given its stellar earnings growth forecasts, I think it well worth the attention of other investors.
