Investor Tribeca presents Glencore with ideas to raise shareholder value

Business: Switzerland-based Glencore PLC produces and markets a diverse range of metals and minerals, including copper, cobalt and zinc. It also markets aluminum/alumina and iron ore from third parties. The company is a producer and marketer of coal, with mines in Australia, Africa and South America. In addition, Glencore also markets crude oil, refined products and natural gas. The company physically sources commodities and products from its global supplier base, and it sells them to customers all over the world, transporting commodities by sea, rail and truck. Further, Glencore is involved in the recycling of copper and precious metals.

On March 13, the Financial Times reported that Tribeca had sent a letter to Glencore’s board, calling on them to (i) transfer the company’s main listing to the Australian Securities Exchange from London; (ii) increase dividends by discontinuing share buybacks; (iii) spin-off its trading division; and (iv) maintain control of its coal operations. Tribeca has been a shareholder of Glencore for seven years and has been engaging with management for a year.

Glencore is a Swiss-incorporated diversified mining company with operations in over 35 countries, primarily engaged in the production and marketing of metals and minerals, energy resources and commodities trading. The company has excellent core asset quality in copper, zinc and coal, as well as a world-leading commodity trading business. Consensus FY25 projections estimate that Glencore’s earnings before interest, taxes, depreciation and amortization is comprised of approximately 25% to copper, 18% to commodity trading, 18% to metallurgical coal, 17% to thermal coal, as well as 22% to zinc, nickel, alloys and others. Despite its core asset quality, strong fiscal position and excellent management team, Glencore has delivered a total shareholder return of 36% since its listing on the London Stock Exchange in May 2011, a profound underperformance compared to peers BHP (+295%) and Rio Tinto (+218%). In addition, despite a quadrupling of EBITDA, Glencore’s enterprise value has risen by only 15% and has undergone continued de-rating from a max EV/EBITDA of 11.5 times in the early 2010s to five times today.

Glencore has had a fluctuating relationship with its coal operations for several years now. Given its listing in London and the general attitudes of ESG-minded investors across Europe, there has been a consistent climate of hostility toward fossil fuels. Notably, Bluebell Capital Partners agitated for a demerger of Glencore’s thermal coal business in 2021. CEO Gary Nagle pushed back, thinking a rundown of the company’s mining operations on a 30-year time horizon was a wiser strategy. However, in 2023, after acquiring a 77% interest in Teck’s steelmaking coal business, Glencore stated its intention to demerge its combined coal and carbon steel businesses. Tribeca thinks this is a non-starter. From a financial perspective, the firm thinks that the coal business delivers strong and stable capital returns in the otherwise cyclical earnings profile of its heavy metals portfolio and should yield a diversification premium. Tribeca notes the transition of the ESG movement over the past several years and astutely argues that part of that transition is that it is better for fossil fuel businesses to be in the hands of responsible stewards who will attempt to optimize ESG factors rather than divest to an owner who does not consider these factors in its operations.

Tribeca also strongly advocates for a relisting of the company to Australia from London, believing that this will accelerate net inflows and provide optionality for corporate activity. The firm argues that London is no longer the home of mining, ascribing only 7% of the bourse’s capitalization to mining versus 16% for the ASX. In addition, London houses virtually no coal miners, and valuations for diversified mining operations are materially higher on the ASX. Tribeca makes several excellent arguments about the Australian appetite for dividends, copper and an increased ability for Glencore to make equity-based acquisitions in Australia. However, Tribeca’s citing of similar moves by peers is even more convincing. When BHP collapsed its dual-listed structure under an Australian parent in 2022, Tribeca initially opposed the move, but has come to see the benefits of doing so in that BHP wiped out the 20% currency-adjusted discount between its LSE and ASX listed shares and lifted its forward EV/EBITDA multiple from sub-four times to nearly six times. Even more compelling, Rio Tinto — which remains dual-listed — continues to see its London-listed shares trade at a significant discount to those trading in Australia. Tribeca thinks that a switch to the ASX could add $13 billion (U.S.) to Glencore’s market cap.

On dividends, Tribeca points out that peers BHP and Rio maintained dividend payout ratios between 60% and 80% between 2018 and 2022, versus 30% for Glencore. Despite embarking on share buybacks — which neither of its peers have done in the past four years — Glencore’s share price has lagged. Tribeca believes this is a result of natural resource investors valuing real capital returns rather than artificial inflation of earnings per share. This, along with the incorporation of franking credits in conjunction with an ASX listing, would make the company very desirable to Australian retail and pension investors and continue to close the valuation gap.

Tribeca also is calling for a minority sale of its trading business, which is a world-class operation and boasts a peer-leading return on invested capital, but is currently lost in its diversification. This is a somewhat tricky issue in that the trading business comes with so many positives and negatives that it is unclear what a divestiture would do for Glencore shareholders. On the positive side, the cash flow from the trading business is crucial for the capital-intensive operations of the rest of Glencore and goes a long way to alleviate the detriments of cyclicality. On the negative side, it is the letter of credits required by the trading business that Tribeca attributes in large part to the underperformance of Glencore. Tribeca floats a possible solution that comes across more like a fantasy: selling 20% of the trading business to Berkshire Hathaway at a 10 to 15 times multiple (it currently trades at 4.8 times), which would hypothetically agree to use its balance sheet to stand behind the trading business.

Tribeca is a long-term shareholder of Glencore and an amicable partner. It’s clear that the firm has a lot of respect for management and is seeking to work constructively on closing the valuation gap. Tribeca’s detailed letter shows that the firm has put a lot of thought into how to create shareholder value and it offers many different paths. Tribeca does understand that it is highly unlikely that the company will take all of its suggestions, but clearly Glencore should take some of these recommendations to increase shareholder value. The easiest one should be retaining the coal business: Divesting it would require a shareholder vote, and Tribeca believes that many shareholders and the company’s CEO are in favor of retaining it. Tribeca has clearly stated that it’s “pushing an open door” with regard to discussions with major shareholders, including former-CEO Ivan Glasenberg and senior management who collectively own 20% of the company.

The listing recommendation is not as simple. As part of the listing move to the ASX, Tribeca discusses a partial secondary listing in London or on the NYSE and recognizes potential issues regarding institutional investors and index ownership of the stock. There is clearly more work Glencore would have to do on this before coming to a conclusion. The same can be said for the divestment of the trading business. The dividend issue is somewhat straightforward, but getting the full value from it would require a move to Australia from London.

Tribeca believes that following its recommendations could lead to upside of at least 30% — and potentially more than 100% — from where the stock is currently trading. The firm makes convincing recommendations, and we expect the company to pursue some of them. However, Tribeca bases a lot of its valuation on re-ratings, multiple expansion, conjecture and speculation: The firm used words like “potential,” “implied,” “assume” and “foresee” more than we are used to seeing in activist letters. So, while we believe this is a well-conceived and reasoned activist campaign with significant upside potential, we take the high end of Tribeca’s range with a grain of salt.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.