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Mining is back! Or is it? After boom years, miners like Glencore (LSE: GLEN) have found the going tough lately. Last year, post-tax profits at Glencore fell over 80% and the dividend was cut by three-quarters. But with signs that demand for raw materials could be set to rebound even amid a fairly weak economy, might the Glencore share price rise from here?
Uncertain demand picture
On one hand, the outlook for mining continues to be plagued both by uncertainty and a generally weak economic backdrop.
More positively, though, governments including China have lately been laying out plans to increase economic growth. We know that sooner or later, demand for natural resources will come back strongly – we just do not know when.
Meanwhile, Glencore has already been performing well even while the price of many of the commodities it sells – such as thermal coal – has been weak. Revenue in the first half showed 9% year-on-year growth. Funds from operations grew by the same amount.
For now, it is hard to say with confidence what the short-term demand picture looks like and what that means for pricing.
Over the medium to long term, however, I expect demand and therefore pricing to grow. That ought to be good for revenues and especially profitability at Glencore, which like most miners has high fixed costs.
Share price could still go either way
If that happens, I think it could be very good news for the Glencore share price. It is 30% lower than at the start of last year. Strong pricing could help push up profits and I reckon the share price would follow.
The market cap is currently slightly less than £50bn. That is barely three times the company’s post-tax profits last year.
If pricing firms and profits soar, the current valuation could look very cheap in retrospect.
Looking from the other side of things, though, last year’s performance seems exceptional. There is a reason post-tax profits fell four-fifths this year. It demonstrates just how turbulent the market for natural resources can be. In itself that merits a discount in the share price.
Not only that, but things could get worse from here.
After all, while many economies are performing weakly, they are not actually in recession. A full-blown global recession – let alone depression – could be very bad news for resource prices and with them, the Glencore share price.
Why I’m waiting
In fact, that explains why I have no plans to invest in Glencore (or any mining companies) for now.
I think the share price may boom at some point but that could be years – maybe many years – in the future.
Once the economy is on firmer ground and we are more obviously in an upward swing in the economic cycle, I would consider buying into Glencore. For now, though, I feel I see better value in other sectors.
