I have always had a weak spot for Glencore (OTCPK:GLCNF) as it has been one of my favorite holdings to gain exposure to certain base commodities (copper, zinc, nickel and coal) and as the market usually overreacts during economic shocks, the Glencore share price usually sinks to low levels as well. This wasn’t different this year and Glencore’s share price has almost doubled from its lows in March.

Source: Yahoo Finance

Although the company’s US listing is relatively liquid with an average of a few ten thousand shares per day for GLCNF and a few hundred thousand shares for GLNCY (which contains 2 ordinary shares of Glencore), I trade in Glencore using the facilities of the London Stock Exchange where the company is trading with GLEN as its ticker symbol. As the average daily volume in London is about 37 million (!) shares per day, trading is much easier there.

The cash flows remained fine

Due to the low commodity prices, Glencore’s revenue dropped by in excess of 30% to just below$71B. However, its COGS also fell by a similar percentage but as the SG&A expenses increased, and the contribution from associates and joint ventures decreased, Glencore obviously still had to deal with a tightening financial performance.

Despite seeing the net interest cost decrease from $862M to less than $800M, Glencore’s pre-tax income fell from a positive $519M to a negative $5.18B.

Source: half-year report

But as you can see on the image above, virtually the entire pre-tax loss was caused by the $5.03B impairment charge on the assets and excluding this charge the pre-tax loss would have been very minimal at less than $150M. And if you’d also exclude the impairment charge on financial assets (related to loans extended by Glencore’s marketing department to trading partners), Glencore would have remained profitable during a very tough semester. This indicates Glencore had its financial situation under control. But of course, an impairment charge remains a negative and of the net loss of $4.52B, approximately $2.6B was attributable to the shareholders of Glencore. This translates to a net loss of approximately 20 cents per share.

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When I saw the main reason for Glencore’s net loss were the non-cash charges, I was hopeful the company’s free cash flow result would be substantially better. And I wasn’t disappointed.

Sure, the operating cash flow was still lower than last year’s performance in the first half of the year but that hardly is a surprise given what the world went through. The operating cash flow decreased from $5.4B to $4.3B. From that amount, we still need to deduct the $602M net interest expenses and the $208M in lease payments as well as the $122M in payments to non-controlling interests.

Source: half-year report

This means that on an adjusted basis, the operating cash flow in H1 2020 was roughly $3.39B. If we would now add back the $143M in dividend payments received (which nosedived from the $447M in H1 2019) and subsequently deduct the $1.55B in capex, Glencore reported a positive free cash flow of approximately $2B. A part will be attributable to the non-controlling interests (on top of the $122M payment made by Glencore to those minority interest holders), but it’s clear that even in a weak H1 2020, Glencore remained free cash flow positive.

Source: half-year report

That being said, Glencore did use a substantial portion of its cash to pay its outstanding invoices and the amount of accounts payable decreased by in excess of $5B. As of the end of H1 2020, Glencore’s balance sheet contained $19.7B in net debt. Please note Glencore also includes ‘readily marketable inventories’ in its net debt calculation as it deems those inventories to be ‘as good as cash’.

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The base commodities aren’t exactly cooperating but Glencore remains a solid investment

My main reason to invest in Glencore is the diversification the company offers as it is a major and dominant player in the copper, coal and zinc space while the nickel production is also getting interesting.

Source: company presentation

Not only are the mines producing most of Glencore’s main products low on the cost curve as you can see above the precious metals that are being mined together with the zinc ore help Glencore to produce its zinc at a cash cost of just 5 cents per pound. Of course, this impressive by-product contribution could easily be reversed if the gold and silver price sinks again, but I think Glencore could be ready to beat some expectations in the current semester as few investors realize the impact of gold and silver on the base metal production cost.

Additionally, after a relatively weak (but still decent) first semester, Glencore is ready to pick up the pace in the current semester and the higher output in combination with the relatively low production cost base bodes well for Glencore’s current semester.

Source: company presentation

Although I am fairly confident to see Glencore’s free cash flow picking up in the current semester, I am pleased to see the company’s management and board is playing it safe and has decided to not pay a H1 dividend (or capital repayment). Instead, it is now planning to first reduce the net debt to less than $16B as its main priority before thinking about committing to additional shareholder returns.

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This doesn’t have to be bad news: Glencore expects its net debt to fall below $16B by the end of this year which seems to imply the company will pay a final dividend over FY 2020 sometime during calendar year 2021 where after it will very likely continue its generous dividend payments.

Investment thesis

Of course, Glencore’s mining operations aren’t always located in Tier-1 mining jurisdictions, and yes, the company is virtually always under investigation to make sure it hasn’t cut any corners. But the simple truth is that Glencore has been and remains a ‘must own’ in a commodity portfolio as this one company offers direct exposure to various base metals while there is an indirect exposure to precious metals that are being mined as a by-product.

I have a long position in Glencore which I substantially expanded during the March crash. I was hoping to pick up more stock at even lower prices but didn’t succeed. Although the first semester was relatively weak, I remain confident in the company as it remains one of the lower cost producers of several base metals. I will continuously be looking to add on weakness.

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Disclosure: I am/we are long GLCNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.