Glencore may see a boost in shareholder value with ideas presented by Investor Tribeca.

Company: Glencore PLC (GLEN-GB)

Glencore, a Switzerland-based company, produces and markets a variety of metals and minerals, including copper, cobalt, and zinc. Additionally, the company markets aluminum/alumina and iron ore from third parties. Glencore is also a producer and marketer of coal, with mines in Australia, Africa, and South America. The company markets crude oil, refined products, and natural gas. Glencore sources commodities and products from its global supplier base and sells them to customers worldwide, transporting them by sea, rail, and truck. Furthermore, the company is involved in the recycling of copper and precious metals.

Stock Market Value: ~53 billion pounds (4.35 pounds per share)

Activist: Tribeca Investment Partners

Percentage Ownership:  n/a

Average Cost: n/a

Tribeca Investment Partners is a specialist active investment and advisory firm with offices in Sydney, Melbourne, and Singapore. Founded in 1999 by Tribeca chairman David Aylward, the firm offers a range of services across asset management, private wealth management, and corporate advisory. While not explicitly an activist, Tribeca is willing to engage its portfolio companies to improve shareholder returns and corporate governance.

What's happening?

Glencore received a letter from Tribeca on March 13, requesting that the company transfer its main listing from London to the Australian Securities Exchange, increase dividends by ending share buybacks, spin off its trading division, and maintain control of its coal operations. Tribeca has been a Glencore shareholder for seven years and has been communicating with management for a year.

Behind the scenes

Glencore is a Swiss-based diversified mining company with operations in over 35 countries, primarily focused on the production and marketing of metals and minerals, energy resources, and commodities trading. The company boasts excellent core asset quality in copper, zinc, and coal, as well as a world-leading commodity trading business. According to consensus FY25 projections, Glencore's earnings before interest, taxes, depreciation, and amortization are estimated to be comprised of approximately 25% to copper, 18% to commodity trading, 18% to metallurgical coal, 17% to thermal coal, as well as 22% to zinc, nickel, alloys, and others. Despite its strong fiscal position, excellent management team, and core asset quality, Glencore has underperformed its peers BHP (+295%) and Rio Tinto (+218%) since its listing on the London Stock Exchange in May 2011, with a total shareholder return of 36%. Additionally, despite a quadrupling of EBITDA, Glencore's enterprise value has only risen by

Glencore has had a fluctuating relationship with its coal operations for several years. Given its listing in London and the general attitudes of ESG-minded investors across Europe, there has been a consistent climate of hostility toward fossil fuels. Notably, Bluebell Capital Partners agitated for a demerger of Glencore's thermal coal business in 2021. CEO Gary Nagle pushed back, thinking a rundown of the company's mining operations on a 30-year time horizon was a wiser strategy. However, in 2023, after acquiring a 77% interest in Teck's steelmaking coal business, Glencore stated its intention to demerge its combined coal and carbon steel businesses. Tribeca thinks this is a non-starter. From a financial perspective, the firm thinks that the coal business delivers strong and stable capital returns in the otherwise cyclical earnings profile of its heavy metals portfolio and should yield a diversification premium. Tribeca notes the transition of the ESG movement over the past several years and astutely argues that part of that transition is that it is better for fossil fuel businesses to be in the hands of responsible stew

Glencore could benefit from relisting in Australia from London, according to Tribeca. The firm believes that this move will accelerate net inflows and provide optionality for corporate activity. While only 7% of the London Stock Exchange's capitalization comes from mining, 16% of the Australian Securities Exchange's capitalization does. Additionally, London has no coal miners, and valuations for diversified mining operations are higher on the ASX. Tribeca makes several compelling arguments, including the Australian appetite for dividends, the demand for copper, and Glencore's increased ability to make equity-based acquisitions in Australia. However, Tribeca's citation of similar moves by peers is even more convincing. When BHP collapsed its dual-listed structure under an Australian parent in 2022, Tribeca initially opposed the move, but has since come to see the benefits. Rio Tinto, which remains dual-listed, continues to see its London-listed shares trade at a significant discount to those trading in Australia. Tribeca believes that a switch to the ASX could add $13 billion (U.S.) to Glencore's market cap.

According to Tribeca, peers BHP and Rio maintained dividend payout ratios between 60% and 80% between 2018 and 2022, while Glencore's ratio was only 30%. Despite embarking on share buybacks, Glencore's share price has lagged. Tribeca believes that natural resource investors value real capital returns rather than artificial inflation of earnings per share. Additionally, incorporating franking credits with an ASX listing would make the company more desirable to Australian retail and pension investors, helping to close the valuation gap.

Glencore is considering selling a minority stake in its trading business, which is a highly profitable operation with a strong return on investment, but is currently being overshadowed by its diversification. This issue is complex because the trading business has both positive and negative aspects, and it is unclear how a divestiture would benefit Glencore shareholders. On the positive side, the cash flow generated by the trading business is essential for the capital-intensive operations of the rest of Glencore and helps mitigate the negative effects of cyclicality. On the negative side, the letter of credits required by the trading business are a significant source of underperformance for Glencore, according to Tribeca. Tribeca proposes a potential solution that seems more like a fantasy: selling 20% of the trading business to Berkshire Hathaway at a multiple of 10 to 15 times (currently trading at 4.8 times), with Berkshire agreeing to use its balance sheet to back the trading business.

Glencore has a long-term partnership with Tribeca, which is a shareholder of the company. The partnership is amicable, and Tribeca has expressed respect for management. The firm has put a lot of thought into creating shareholder value and has offered several paths. While it is unlikely that the company will take all of Tribeca's suggestions, Glencore should consider some of them to increase shareholder value. One recommendation is to retain the coal business, which would require a shareholder vote and is supported by many shareholders and the CEO. Tribeca has stated that it is "pushing an open door" with regard to discussions with major shareholders, including former-CEO Ivan Glasenberg and senior management who collectively own 20% of the company.

The listing recommendation for Tribeca is not straightforward. The company discusses a partial secondary listing in London or on the NYSE, but recognizes potential issues regarding institutional investors and index ownership of the stock. Glencore would need to do more work before making a decision on this matter. Similarly, the divestment of the trading business is not straightforward, and getting the full value from the dividend issue would require a move to Australia from London.

Tribeca recommends following its advice, which could result in a 30% increase or even more than 100% from the current stock price. The firm provides convincing recommendations, but its valuation is based on re-ratings, multiple expansion, speculation, and conjecture. The use of words like "potential," "implied," "assume," and "foresee" is higher than usual in activist letters. While we agree with the campaign's potential, we take the high end of Tribeca's range with a grain of salt.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.