Glencore (LSE:GLEN, Financial) (Switzerland), one of the world’s largest mining firms, was a notable detractor for the first quarter. The company’s full-year 2022 results were strong in an absolute sense, including an 84% increase in EBIT year over year, but they fell short of market expectations. This shortfall was driven entirely by the industrial business. In contrast, marketing significantly exceeded our expectations and produced adjusted earnings of $6.38 billion, nearly double the high end of Glencore’s long-term guidance for the segment, due to exceptional profitability from the energy segment. The industrial division fell short of our expectations due to a mix of production issues in coal and at two copper assets, Katanga and Mt. Isa, as well as cost inflation related to labor, diesel and explosives. Glencore also announced an incremental $7.1 billion of distributions to shareholders. While a very high number and implied yield, this was actually somewhat lower than had been expected under Glencore’s capital allocation policy due to weaker free-cash generation during 2022 driven by working capital constraints. During a call with management, CEO Gary Nagle revealed that the company sees significant latent potential to double its copper business organically over the next decade via brownfield expansions and an attractive greenfield project in Argentina. Although the company is waiting until the market demands the tons, Glencore is acquiring land, conducting sample testing and doing permitting work to help ensure these projects can be completed within a timely manner once sanctioned. Further, Nagle remains committed to the rundown of Glencore’s coal assets over time in accordance with the company’s strategy, but he reiterated the belief that they should be very strong profit and cash flow contributors for the company due to an attractive cost position and favorable supply/demand dynamics. We continue to believe that Glencore is an attractive holding and that management is committed to delivering value for shareholders.
From David Herro (Trades, Portfolio)'s Oakmark International Fund first-quarter 2023 commentary.
