Glencore (LON: GLEN) shares are up marginally, 1 and 2% in the past couple of days, on the back of the Q1 production report. The basic message is that mining activities are much as was originally expected. As mining is a pretty long-term activity, this is as it should be for mere quarterly results. Markets for the production, though, are much more volatile, and this is where the trading arm is adding substantial value to the group.
It’s important to understand something about trading operations within a mining group. It is possible to try to take a position, to forecast prices. This is also known as speculation and it can produce very large profits – but also rather large losses if the positions were wrong.
On the other hand, there is hedging. As a miner is a natural long of the things being mined, then using the markets to hedge prices adds value. There is also the simply trading of materials produced or used by others and Glencore has a substantial division doing just this – it’s largely what the group grew out of, exactly such an operation which then added its own production to itself.
Such trading operations, allied with good hedging, benefit substantially from price and market volatility. Which is exactly what we’ve been having these past few months of course. We’ve had that short squeeze on nickel at the LME, the events in Ukraine, certain metals markets are soaring on more basic supply issues – lithium and tin, for example, not that those are core Glencore materials – and this is just where we’d expect traders to be able to make hay.
This is what is driving this: “periods of extreme volatility. Extrapolating our Q1 performance would see our Marketing segment's full-year earnings comfortably exceeding the top end of our long-term Adjusted EBIT guidance range of $2.2-3.2bn p.a.”
This is largely what the new information contained is. For as above, mining itself is a fairly long-term proposition. Barring disasters, volumes produced don’t change much month by month or q by q. Any significant increase in production by volume is pretty well telegraphed in advance. Prices for output can be roughly estimated by looking at market prices in the terminal markets. So revenues can be roughly worked out at any one time.
So, we might think there’s little to surprise in the accounts of a mature miner. And this is often so too. We can look at a copper miner, check the copper price, think about whether they’ve announced any major change in production, then have a good guess at revenues. So too with cobalt and so on.
With Glencore, there’s that additional trading sector, though, and as above, this is the new news in the release that revenues there could be well above expectations.
Sustained volatility in the metals markets is likely to boost Glencore shares over time, that is.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.