Glencore Gets an Upgrade from JPMorgan Because It’s Heavily Exposed to Commodity Prices

Mining and commodities trading giant Glencore has been upgraded to overweight by JPMorgan, partly due to its exposure to base metals and copper prices, which have rallied in recent weeks.

Copper futures rose above $4 a pound on Friday for the first time since September 2011, moving higher again on Monday above $4.12 amid hopes of the global economic recovery gathering pace. Nickel and aluminum prices have also hit multiyear highs.

Glencore has the highest exposure to base metals and copper, around 40% of earnings before interest, taxes, depreciation, and amortization (Ebitda), of all the U.K. diversified miners, JPMorgan analysts said. They added that higher commodity prices in 2021 will have a “transformative impact” on Glencore’s earnings and cash flow. They estimated Ebitda of $17.9 billion in 2021 and $18.2 billion in 2022, compared with $11.6 billion in both 2019 and 2020.

The company posted a net loss of $1.9 billion in 2020 after writing off assets worth $5.9 billion, but reinstated its dividend as net debt fell 10% driven by higher commodity prices in the second half of the year. JPMorgan said it had greater confidence in the company’s outlook after the recent results, improving operational stability and new guidance.

Glencore is more exposed than its peers when it comes to rising prices. A 10% rise in all commodity prices in unison leads to a 43% increase in the miner’s estimated annual earnings per share (EPS). In comparison a 10% change in all commodities has a 15% impact on Rio Tinto and BHP’s EPS and a 20% impact on Anglo American’s , JPMorgan noted.

Miners in the Europe, the Middle East and Africa region are cheap and “high-yielding reflation proxies,” the investment bank’s analysts said. They added that mining stocks are positively correlated to rising bond yields, noting that JPMorgan economists have raised their 10-year U.S. Treasury yield forecast to 1.65% by the fourth quarter of this year. Expected earnings for EMEA miners are set to surpass the “Supercycle peaks” of 2011/12, they said.

Glencore still has higher regulatory and environmental, social, and governance risks than BHP, Rio Tinto and Anglo American, the analysts admitted, most notably ongoing investigations by the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission.

But improving operational outlook and “surging earnings momentum” created a low bar for a price target of £3.50, compared with Monday’s price of £3.03—even with JPMorgan’s “conservative” commodity price forecasts, they said.

Glencore’s investment case was more intrinsically linked to its leverage than peers, they said, due to the debt-funding requirements of its marketing activities. “At current commodity prices we estimate net debt will fall to the bottom end of management’s $10 billion to $16 billion target range in 2021, which unlocks capital headroom,” they said.

Despite the upgrade and the target price increase, JPMorgan said a resolution to the company’s regulatory issues was likely required to “fully revitalize” the investment case for global investors.