Glencore: Analysis of the 2017 financial statements

Glencore

Analysis of the 2017 financial statements

1. Objective of the Analysis

The objective of the financial analysis is to identify sound entities for long-term investment purposes.

For the purposes of this analysis I will have look at the following:

• An overview of the operations
• The management team
• Strategic drivers and key success factors
• Outlook
• Financial information

2. Background

Glencore operates in 50 countries around the globe with 146 000 employees handling more than 90 commodities with revenue of US $ 205 billion and an asset base of US $ 135 billion.

The Group is involved in the exploration, extraction, production, blending, optimisation, logistics and marketing of more than 90 commodities.

3. Management

The board of directors is well experienced and consists of people across the world with a wide degree of experience and exposure.

4. Strategic Drivers

The key strategic drivers and success factors of the Glencore Group are:

High quality, low cost assets in desirable commodities

Entrepreneurial culture: Employees empowered to make decisions

Long-term relationships with a broad base of suppliers and customers

Marketing business less correlated to commodity prices

Maximum flexibility and economies of scale

5. Risks

The following are the major risks facing the Group according to management:

Health and safety matters

Emissions and climate change

Community relations and human rights

Skills availability and retention

Commodity prices

Fluctuations in demand for commodities, paces and exchange rates

Liquidity risk

Counter party credit and performance

Geopolitical risks

Compliance with laws and regulations

Operating and cost risks

Cyber risks

With regards to the audit report the following are the key risks:

Impairments

Revenue recognition

Fair value measurements

Classification of financial instruments

Credit and performance risks

Taxation

Katanga Mining – restatements

6. Outlook

Glencore is focussing its efforts to a certain degree on electrical motor vehicles. This, however, is a long-term goal, but for the immediate foreseeable future one has to focus on the global economic outlook.

China, a major use of commodities is now growing as it should, while the outlook for Europe is not that favourable. The USA and India do hold some promise of economic growth.

7. Analysis of financial information

7.1 Segmental information

Energy products is the major contributor to revenue (US $ 118 b out of a total of US $ 182 b) with a very low margin of 1,9% EBIT contribution (or $ US 2 b of a total EBIT of US $ 9 b), while Materials and Minerals contributed 76% of EBIT. The margins of 4,2% of revenue are extremely low.

7.2 Liquidity ratios

Both the current and acid test ratios indicate signs of short-term financial stress.

7.3 Leverage ratios

The debt levels are too high.

7.4 Activity ratios

Working capital is under sound control, while the Group experience a negative working cycle, i.e. when activities increase, the Group will need more working capital.

7.5 Profitability ratio

Both gross profit and net profit margins are very low.

7.6 Cash flow

The operating cash generated from operation as a ratio of total debt is very low.

7.7 Growth

The growth in sales amounted to 34% (2016 – 4%) which is commendable. The operating expenses dropped substantially.

8. Conclusion

The profitability of the Group is under pressure, but it improved substantially (from a loss of US $ 8 379 m in 2015, to a pre-tax profit of U $ 5 6 921 m in 2017) due to the increase in revenue. This was also due to a substantial saving in operating expenses: Down from US $ 9 024 m in 2015 to US $ 1 904 m in 2017.

The debt levels are high, but in view of the increase in revenue and a cut in operating expenses, this might be addressed in future.

The profit margins are under tremendous pressure.

Perusing certain segments like Energy Products contributing US $ 2 b profit needs to be debated – I can only think how much of management’s time and effort goes into such activities.

The financial analysts rate the share as a Buy, while my evaluation of the share price performance in relation to the JSE top 40 rates it at a 4 out of a possible 5.

In view of the turn around in terms of the increase in revenue, and the decrease in operating expenditure, and on the assumption that this may continue, this might be a good investment for the long-term. However, it is suggested that the investment should be closely monitored.

Anton Ferreira

30 January 2019