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One of the best-performing stocks in the FTSE 100 over the past month is Glencore (LSE:GLEN). The Glencore share price is up an impressive 23% over this period, and 27% over the past year. From my research, there are several reasons behind this move, which could dictate the direction of travel for the coming months.
Reasons for the move
Recent reports suggest Rio Tinto is exploring a potential acquisition or merger with Glencore that could create one of the largest mining giants globally. Earlier this month, Rio Tinto put out a statement saying that “Rio Tinto and Glencore have been engaging in preliminary discussions about a possible combination of some or all of their businesses”.
Of course, it’s early days, with a deal this size taking months to get things moving. But it’s clear there’s intent on both sides to make something happen, which has naturally driven a spike in interest in the Glencore share price.
Another factor helping the business in recent weeks is the move in key commodity markets. Base metals have surged in January, particularly copper. Glencore has large exposure to copper and other metals, including gold and silver. The rise in raw material prices, it means the business can benefit from selling at higher prices. This should translate into higher profits.
The direction from here
I’m very much in the camp that certain metals, such as gold and silver, are in a long-term move higher. There are plenty of reasons that support a continued price increase. These include lower interest rates globally, continued geopolitical uncertainty and higher industrial demand (particularly relating to silver and copper).
As a result, I think commodity stocks like Glencore could do well as the business grows profits amid elevated commodity prices. This really works in its favour due to operational leverage. This refers to how revenue can increase faster than costs. For example, gold prices could jump 10% tomorrow, but the cost of production hasn’t changed. This is why companies like Glencore do very well during boom periods for raw materials.
The merger with Rio Tinto is definitely something that will dominate conversations in the coming months. If things proceed, there’s the risk that Glencore gets delisted, with the combined company trading under the Rio Tinto brand. Ultimately, this could make any investment in Glencore short-lived, which is something that needs to be noted. Another risk is that if the deal falls apart or gets messy, Glencore shares could slump as optimism quickly fades.
Therefore, although the strong performance over the past month is partly due to fundamentals, I’m cautious about buying now given the uncertainty around the Rio Tinto deal. I’d prefer to consider other commodity stocks that aren’t in merger talks for a cleaner investment opportunity.
