Ive been writing for the Motley Fool since 2010. Despite Glencore (LSE: GLEN) being a major FTSE 100 company, I dont recall ever having written about it prior to this year. And Im even more certain that the first time I had anything positive to say about it was as recently as July.
Ill come back to why Id never written about Glencore, because that is at the heart of the big lesson the company has taught me over the last couple of months. First, though, what got me interested in Glencore after having ignored it for so long?
In the latter part of July, the companys shares were trading at more than 60% below their 2011 IPO price of 530p giving a potential 150%+ upside if they could return to their former glory. Just for good measure, the dividend yield was running at a juicy 5.5%. At these levels, and with the mining sector out of favour, surely Glencore was at least worth having a look at as a potential contrarian value bet?
One big positive I saw in Glencore was an owner-oriented management team wholly aligned with external shareholders. Indeed, the chief executive had an interest in over 8% of the companys shares. In its full-year results, Glencore had reminded investors of the companys goal to grow free cash flow and return excess capital to shareholders, and the CEO expressed his optimism: We look forward to the future with confidence.
I persuaded myself that Glencore might be a great contrarian pick at the then price of 220p.
However, the shares continued to make new lows ahead of half-year results in August. As expected, the numbers werent good, but there was strong reassurance from the directors. They spoke of the companys strong and flexible balance sheet, with $10.5 billion of committed available liquidity at period end, and were pleased to announce a maintained interim dividend, reflecting our confidence in the quality of our underlying operations, commodities mix and sustainable cash flow profile. The chief financial officer immediately bought 1 million shares at 173p.
If I thought Glencore was value at 220p, it was surely even better value now after the reassurances about the strength of the balance sheet and liquidity, sustainability of cash flow and dividend, and the big share buy by the CFO.
However, less than three weeks later, Glencore announced an equity fundraising, and a mass of debt reduction and capital preservation measures (including the suspension of dividends), after the CEO and CFO said through gritted teeth recent stakeholder engagement.
Glencores shares closed last Friday at 95p, having traded as low as 67p earlier in the week.
Now, Glencores shares may, or may not, recover; but either way this is a company I really should have continued to ignore. Why? Well, it goes back to why Id never written about it prior to this year: namely, I simply dont understand Glencores business.
You only have to read the What we do page, and particularly the Marketing & Logistics page, on the companys website to realise that Glencore is a mind-bogglingly huge and complex commodities business.
Glencores unique business model means that even professional analysts struggle to get to grips with what if? scenarios, relating to movements in commodities prices, capital allocation, working capital, inventory and so on. Some analysts have been painting particularly bleak pictures. Glencores directors may have been confident in the half-year results, but institutional stakeholders were nervous and pushed for the radical steps the directors announced just a few weeks later.
Glencores falling share price may have caught my contrarian eye; the Boards stake in the company and confidence (not least in share-buying after the results) may have been hugely positive, but I shouldnt have let these things eclipse the tenet: steer clear of businesses you dont understand. It has served me well over the years.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.