Glencore’s (LSE: GLEN) share price continues to trade way below its ‘fair value’. That is despite its strengthening operational performance and improving backdrop for commodity price rises.
With copper demand accelerating and the firm’s production rising, it is generating the kind of cash flows typically rewarded with higher valuations.
Add in a cleaner balance sheet and clearer capital‑return strategy, and Glencore stands out as a compelling undervaluation prospect for long‑term investors.
So, how high could the stock go?
What are the key business drivers?
Glencore mines and trades commodities, making money at every stage of the process from shovel to shipping. Its primary focus is on becoming the world’s leading supplier of materials used in the energy transition, particularly copper.
To fund this aggressive expansion, Glencore is using the enormous cash flows generated by its coal division. The costs associated with this are minimal, as the sector is in wind-down phase, but global demand remains high.
By doing this, rather than seeking financing from loans in the capital markets, Glencore maintains a much cleaner balance sheet. Essentially, coal is bankrolling the firm’s transition to a green mining powerhouse.
What are the risks and rewards here?
Glencore’s strategy is not without its challenges. Regulatory pressure on coal could disrupt cash flows, for example. Another is geopolitical instability in key mining regions, which could delay expansion plans.
Yet global copper demand is forecast to increase by over 20% by 2030 and to double by 2050. And long-term price predictions project copper surging toward $15,000 (£11,300) per metric ton from around $13,000 now.
Given this and provided Glencore successfully channels coal‑generated cash into its transition metals portfolio, it could be one of the most profitable beneficiaries of the global energy shift.
Analysts forecast that the company’s earnings will increase by an annual average of 22% over the medium term at least. And it is ultimately this that powers any firm’s share price towards its fair value over time.
So where’s fair value for the shares?
When valuing a business, discounted cash flow (DCF) analysis remains one of the clearest ways to estimate where a stock should trade, in my experience.
It does this by projecting future cash flows and translating them into today’s money. The less straightforward those forecasts are, the heavier the discount becomes. And differing assumptions here sometimes can mean analysts’ DCF outcomes can vary occasionally.
But using my own assumptions — including an 8.5% discount rate — Glencore screens as 54% undervalued at its current £5.58 price.
That points to a fair value of £12.13 — more than twice today’s price.
This difference between price and value is critical in maximising profits, as historically shares trade to their fair value over time. So, if that trend continues, this could be a tremendous potential buying opportunity, if those DCF assumptions hold good.
My investment view
I already hold a stock (Rio Tinto) in the commodity sector, so adding another would unbalance my portfolio.
However, if I did not have this I would buy Glencore now for its strong earnings growth prospects and energy transition strategy.
For the same reasons, I think it well worth the consideration of other investors.
Should you invest £5,000 in Glencore Plc right now?
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Simon Watkins owns shares in Rio Tinto.
