Glencore share price impending death cross point to more pain

Glencore (LON: GLEN) share price has been in a steep sell-off after peaking at 507p on May 20th this year. It slipped to a low of 381p this week and then rebounded to 404p after the company decided to keep its coal business.

Glencore to keep coal

Glencore has decided to maintain its coal assets, as we had recommended in 2023. At the time, the company’s goal was to buy Teck Resources’s coal business, combine it with its coal operations, and then spin the bigger company into a separately traded company.

Glencore’s remainco would be a company free from coal, a commodity that many activists believe is not clean. By exiting the industry, Glencore would instead focus on futuristic commodities like copper and nickel, and potentially attract a higher valuation by attracting Environment, Social, and Governance (ESG)-focused investors. 

However, available data shows that the strategy does not always work well. A good example of this is Anglo American, which separated its coal business into a company known as Thungela Resources in 2021. Since then, Thungela shares have risen by over 500% while Anglo American is in the red.

Proponents of the separation, however, point to other companies. For example, Teck Resources shares have soared in the past few years after it revealed its plans to abandon its coal business. 

However, this rebound is partly because the company has been a takeover target. Glencore made a bid for the company in 2023 and there are rumours that Rio Tinto was considering buying the company. 

Proponents also point to another company: Freeport McMoRan, an American publicly traded company that focuses on copper. Data shows that the company trades at a significant premium compared to other mining companies. 

FXC has a trailing price-to-sales ratio of 30, which is even higher than that of the S&P 500 index, which stands at about 20. In contrast, Glencore has a multiple of 14.6 and BHP has 18.

In its statement, Glencore noted that it decided to end the separation after carrying out in-depth discussions with its shareholders. Billionaire Ivan Glasenberg, the former CEO and one of its biggest shareholders, has long opposed the deal, arguing that the process would be costly and erase the benefits of the demerger. 

Coal is an important resource

Experts believe that coal is still an important resource that will continue providing energy for a long time. While countries are investing in renewable energy, coal will continue being a vital player in the energy mix. 

For example, the most recent data shows that China is still opening new coal plants. As a result, its consumption totalled about 91.94 exajoules, an increase from the previous 87.54 exajoules. 

The US is still producing and consuming a lot of coal. The most recent data shows that the US consumed 100.2 Mmst in the first quarter of this year, a 1.5% decline from the same quarter in 2023. 

While coal prices have retreated in the past few months, it has some strong fundamentals. For one, new coal mining approvals are taking longer and production in some countries like the US and Canada is slowing. 

The industry is not seeing strong investments, meaning that the price could do well in the long term. Indeed, the average price of coal exports in the US has risen from $104 in 2018 to $153 while imports have soared from $82 to $232. 

Glencore financial results

The Glencore stock price rose after the company published mixed financial results. Its revenue rose by 9% in the first half of the year to $117 billion while its adjusted EBITDA dropped by 33% to $6.3 billion. Its funds from operations rose to $4.0 billion. 

Coal is still an important part of Glencore’s business as the energy and steelmaking coal business brought in an EBIT of over $1.2 billion, while its metals and minerals segment had over $2 billion in adjusted EBIT. 

Now, with the spin-off deal out of the table, analysts expect that the company could increase its distributions to investors. That’s because its net debt after cash commitments needs to move below $10 billion and is just $300 million to hit this level. Some analysts expect the company’s adjusted net debt to be about $6 billion.

Glencore share price analysis

The daily chart shows that Glencore’s stock has not been doing well. It made a strong bearish breakout after forming a head and shoulders pattern. In most cases, this pattern is one of the most bearish ones in the market. 

Now, there are signs that the stock is about to form a death cross as the 200-day and 50-day moving averages near a crossover. On the positive side, however, the stock has formed a bullish engulfing pattern. 

Therefore, I suspect that the GLEN share price will rise a bit and then resume the downward trend as commodity prices fall.