How Glencore Plans to Allocate Capital amid Strong Finances



Capital allocation

Glencore’s (GLEN-L) financial position has improved greatly since 2015, when concerns over near-term debt maturities—coupled with falling commodity prices—triggered a massive sell-off in the stock. Now, not only has the company restored its dividend program, but it’s also looking at inorganic growth. In this part of our series, we’ll look at Glencore’s capital allocation strategy (EWU)(UKX-INDEX).

Along with the 2017 annual results, Glencore said the company would like to keep its net debt between $10 billion and $16 billion and would cap its net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) to 2x.

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Inorganic growth

Ivan Glasenberg, Glencore’s CEO, noted alongside the company’s 2017 annual results, “We’re not sitting on our hands if opportunities present themselves. We always will react. And if they make sense and they fit our business model, we’ll look at them, but we do have strong criteria, investment criteria, whether we do go ahead with them.”

Currently, Glencore’s net debt of $10.7 billion is toward the lower end of its target debt range. Commodity prices have been strong so far in 2018, and as things stand today, there looks to be no reason to expect a sharp decline in commodity prices (ANTO)(AAL-L).

Cash flows

A higher commodity pricing environment could boost Glencore’s 2018 cash flows, and the company would have to look at growth opportunities or return cash to shareholders in order to keep its net debt within the targeted range. Last year, during their investor update call, Glencore listed a new flexible dividend policy (FCX). See Key Takeaways from Glencore’s Investor Update Call to look at Glencore’s dividend policy.

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