Glencore investors set for ‘outsized’ returns thanks to coal – Morgan Stanley


In 2021, in the era of ESG, a bullish view on coal is perhaps as rare as it once would’ve been to see a clean face down the pit. Nevertheless, analysts at American bank Morgan Stanley (NYSE:MS) reckon investors in Glencore PLC (LSE:GLEN) are set to see ‘outsized returns’ thanks to record level coal prices.

Glencore shares will continue to outperform, according to analyst Alain Gabriel, who in a note highlights a favourable economic scenario for the miner and commodity trader.

“In spite of thermal coal’s medium-term demand headwinds, current record prices are evidence that ‘commodities of the past’ can have sharp up-cycles and generate record margins, absent meaningful supply growth,” the analyst said.

“Current supply constraints look likely to persist through first half 2022 with demand remaining robust on winter restocking in key markets.

“Our commodities team sees upside risks to their estimates and expects tightness into 2022. This is enabling coal producers to generate significant profit margins.”

Morgan Stanley has an ‘overweight’ rating and a 360p price target, suggesting some 8.4% upside to the current price of around 332p. But, in the new note, the US bank also predicts that the Glencore price could go to 410p if coal prices hold up into the new year.

Analyst Alain Gabriel recognises known regulatory and legal risks but suggests these are priced in, moreover at the current level he reckons the risk vs reward favours buyers of the stock.

“We take note of the regulatory risks pertaining to the ongoing investigations notably by the US Department of Justice (DoJ) and the UK Serious Fraud Office (SFO).

“However, shares shed US$12bn of cumulative market capitalisation on the respective days of announcements, which signals that the market is already recognising these risks.

“In fact, a potential resolution could ultimately remove a key uncertainty to the investment case.

“Either way, we argue that the current valuation gap to peers and the compelling capital returns prospects outweigh these regulatory risks.”


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