Glencore's Poised for Record Profit Despite Horrible Year

(Bloomberg) -- Glencore Plc may have had a nightmarish year so far, but the world’s top commodity trader is still raking in mountains of money.

The company is facing a U.S. corruption probe, got mired in a dispute with its billionaire former partner in the Democratic Republic of Congo and has been caught in the fallout from new U.S. sanctions on Russia -- among other issues. Yet despite all the bad news, Glencore is expected to report its most profitable six months ever when the company publishes first-half results Wednesday.

Glencore's Poised for Record Profit Despite Horrible Year

While some of the issues have since been resolved, the company’s shares are down 17 percent this year, compared with gains by rivals like BHP Billiton Ltd. and Anglo American Plc. Analysts are more optimistic, meaning that Glencore’s share discount to the average target price is near its widest in half a decade.

“Glencore has always had reputational issues, but even by their standards this has been a particularly horrific six months,” said Ben Davis, an analyst at Liberum Capital Ltd. “Glencore is showing that it’s a riskier beast than its rivals and it trades at a discount because of that.”

Here’s what’s gone wrong for Glencore this year:

December-FebruaryPartner Dan Gertler is sanctioned by the U.S.; Glencore is forced to stop paying royalties to the billionaire.
March Glencore’s Congo unit says it may face legal action over a capital shortfall.
AprilPartner United Co. Rusal is sanctioned by the U.S.; Glencore cancels a planned share swap and declares force majeure on some aluminum contracts.
AprilA Congo court freezes Glencore assets in the country after it failed to pay Gertler royalties.
MayBloomberg reports that the U.K.’s Serious Fraud Office plans to seek formal approval for a full probe into Glencore’s dealings in Congo.
JuneCongo adopts a new mining code that was fiercely resisted by companies including Glencore.
JulyU.S. authorities say they’re probing the company for possible corruption in Nigeria, Congo and Venezuela from 2007 to the present.

Despite all that, Glencore is expected to report adjusted earnings before interest, taxes, depreciation and amortization of about $8.5 billion in the first half, its biggest ever.

Those earnings are likely to be driven by bumper profits from coal -- Glencore is the world’s biggest shipper -- where prices have surged, along with increased copper and cobalt production. The company has already forecast that profits from its hallowed trading business will be close to an all-time high.

Credit Suisse Group AG says that while the U.S. probe has cast a shadow over the company, it has more growth potential than its closest rivals. “We estimate Glencore is on track to deliver peer-leading volume growth over the next three years,” the bank said.

Glencore's Poised for Record Profit Despite Horrible Year

Glencore is the last of the big miners to report first-half earnings -- BHP Billiton runs on a different financial calendar and will post full-year results later this month -- with Rio Tinto Group and Anglo already reporting big profits. The companies’ use of extra cash has diverged, with Rio saying it would funnel $7 billion back to shareholders, while Anglo approved a $5 billion new copper mine.

Glencore has favored building a war chest for deals in recent years rather than giving money back to shareholders. Yet last month, just days after being hit by the U.S. probe, it announced it was buying back $1 billion of shares. The repurchase amount could be increased this week, Liberum and Macquarie Group Ltd. suggested.

“I expect an increase in the buyback but management might be reticent, especially if they want the firepower to go out and do other things,” said Davis from Liberum.

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