February 20, 2019 / 7:22 AM / a year ago

Glencore announces $3 billion buyback plan as profit jumps despite cobalt dip

(Reuters) - Weaker cobalt prices dented earnings at Glencore’s trading division last year, but strength in other commodities helped the company to post an 8 percent jump in core profit and announce a share buyback program worth up to $3 billion.

FILE PHOTO: The logo of commodities trader Glencore is pictured in front of the company's headquarters in Baar, Switzerland, July 18, 2017. REUTERS/Arnd Wiegmann/File Photo

Glencore is well placed to supply copper and cobalt needed for a shift to a more electrified economy and the buyback should bolster a share price that has come under pressure because of its operations in politically risky Democratic Republic of Congo.

The commodities giant, along with China, dominates the market for cobalt, which is used in batteries and has prompted a flurry of new entrants looking to capitalize on growing demand for electric vehicles.

Though that has led to oversupply, Glencore says that is likely to be temporary, with Chief Financial Officer Steve Kalmin telling reporters on Wednesday the market was suffering from “a bit of indigestion”.

“Companies, including ourselves, need to be smart about how they manage supply,” he said.

Glencore’s share price has been underperforming its peers since the middle of last year, when the U.S. Department of Justice demanded documents about Glencore’s business in the Democratic Republic of Congo, Venezuela and Nigeria.

Shortly afterwards Glencore announced a share buyback worth $1 billion and subsequently said its focus would be buybacks rather than deal-making.

The company’s core profit rose to $15.77 billion for 2018, below a $16.14 billion consensus estimate from research company VUMA, while the trading division’s earnings before interest and tax dropped by 17 percent to $2.4 billion.

RECORD EARNINGS

Glencore said the core earnings were a record high and the weaker trading figures were mostly because of lower cobalt prices, which have crashed to two-year lows around $31,000 a tonne from close to $100,000 in the first half of 2018.

Wednesday’s pledge to buy back shares includes a $2 billion program that will run until the end of 2019, which CEO Ivan Glasenberg said will be topped up “as market conditions support”, using a targeted $1 billion of non-core asset disposals this year.

He declined to give details on what Glencore might sell.

In addition to strength in copper and cobalt, Glencore is also the world’s biggest supplier of seaborne coal, which analysts say has added to pressure on the share price because of climate concerns.

On Wednesday Glencore also said that following discussion with its investors it would limit coal production capacity to current levels of about 150 million tonnes.

Glencore’s coal capacity has been boosted by acquisitions made last year when the company said it would benefit from demand for high-quality coal as many players withdrew from the commodity.

Glencore’s share price was down 0.3 percent at 1051 GMT, with analysts describing the results as mixed while welcoming the buyback.

“Glencore remains in a strong financial position, but the sell-off in its shares relative to peers clearly leaves it feeling a little defensive,” said Edward Sterck of BMO Capital Markets, which rates Glencore “outperform”.

“The share buyback reinforces this perspective and does seem like the most sensible option.”

Editing by David Goodman

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