Glencore (Price: 362p | Target: 380p | Rec: Add) Glencore has outperformed peers significantly in recent months and with iron ore pricing looking increasingly weak, we believe the company’s greater earnings diversity continues to place it at a distinct advantage within the large cap mining sector.

Back in mid-June, we argued that Glencore offers more varied exposure to commodities with stronger fundamentals and greater scope for upside from commodity rallies.

We set this against Rio Tinto (Hold), where heavy iron ore exposure undermines the value case.

Our argument still stands. * We have updated our estimates following the interims and raised our target price to 380p (from 360p) and our recommendation to Add (from Hold). * Glencore’s management was the fastest to slash capital profiles and highlight the need to return money to shareholders, in our view.

The share buyback of up to US$1bn outlined at the interims made it the first of the majors to firmly outline how it planned to return surplus cash.

We note that Rio Tinto has indicated its intentions to do so, with details due in February.

BHP Billiton (Hold) has made no commitment beyond progressive dividends and the spin-out of NewCo.

Anglo American (Hold) needs more time to strengthen its balance sheet before it will be in a position to offer greater shareholder returns. * Glencore has substantial scope to return funds to shareholders in the coming years, provided it retains its gearing metrics, and management has indeed said it will return surplus cash to shareholders.

We estimate that US$25bn of bonds will come due by 2020, but believe the company will have no difficulty in refinancing given strong cash flows, e.g.

c.US$3.7bn bonds were issued in H1.

While debt may be an issue for some investors, an aggressive balance sheet is a deliberate part of Glencore’s strategy.

We believe this is justified since management does not see a sufficient reduction in the cost of debt from moving to a higher credit rating.
To access the full note please click here Analyst: Marc Elliott +44 (0)20 7597 5189
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