How Glencore is worth a fifth more than this

A year ago, Glencore was written off as the corporate equivalent of a dead man walking. Suffocating under a mountain of debt and with commodity prices plunging, we were warned that shares in the miner and commodities trader could be worthless.

Skilful management made sure that never happened. In fact, investors could have made a fortune backing Ivan Glasenberg & Co. His latest update offered further good news, and analysts at UBS think Glencore shares could be worth an extra 20%.

"Last year we announced a programme of measures to reduce our debt and structurally increase the flexibility and strength of our balance sheet," explained chief executive Glasenberg Thursday.

"We have delivered on our commitments and done so in a way that has preserved the long-term earnings capability of the group. Glencore can look forward to the future with confidence, based on our scalable and low cost industrial operations and robust marketing business."

Crucially, we heard confirmation that free cash flow is tipped to reach $6.5 billion in 2017 from cash profit (earnings before interest, tax, depreciation and amortisation - EBITDA) of about $14 billion (£11.1 billion). That's based on forward prices for 2017 and a conservative coal price.

For shareholders, it means Glencore can reinstate the dividend, suspended in September 2015 as part of an exercise to slash net debt from $25 billion. On track to reach $16.5-17.5 billion by the end of 2016, the firm will hand back $1 billion to investors next year. Free cash flow forecasts imply $2.2 billion in 2018, according to UBS, giving a yield of over 5%.

"We have a 'buy' on GLEN as we believe its valuation is compelling, it offers leverage to commodities which have the most attractive fundamentals (Copper, Zinc, Nickel), and it will deliver material volume growth from latent capacity," writes the broker.

"We expect the share to re-rate as returns step up in 2017E and 2018E. In our opinion, GLEN's investor update call was reassuring."

It also likes production, cost and capital expenditure guidance in line with its own, plus reiteration that zinc production will not restart until the market needs the volume.

"Our base case assumes the stock trades at 12x [price/earnings multiple] for Marketing (conservative vs Gordon Growth Model implied multiple of 13x) and 0.8x [net present value] for Industrial (in line with peers)," says UBS, which repeats its 330p price target.

Watch this director's trades like a hawk

UBS's optimism is potentially great news for shareholders who bought in at anywhere near the 67p low in September 2015. Among them was Glencore's non-executive director Bill Macaulay.

I mention him because he's just booked a £2.5 million profit on Glencore shares he bought for 90.91p each in October last year.

Still running US private equity firm First Reserve Corporation (FR), where he's been since its inception in 1983, Macaulay sold 1.5 million shares at 260p a fortnight ago. He still has 200,000 of that stake left, perhaps to play any further upside.

This is significant because Macaulay has a reputation for making great calls on Glencore trades, both on his personal account and for First Reserve.

In June 2015, his FR Galaxy Holdings finished offloading 135 million Glencore shares at 278-302p, netting almost £390 million. Within a few months the shares had collapsed over 75%.

First Reserve, along with BlackRock, the Government of Singapore Investment Corporation (GIC) and China's Zijin Mining Group, invested in Glencore through a $2.3 billion convertible bond in 2009. Glencore floated two years later at 530p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.