By Barbara Lewis
LONDON (Reuters) - Mining group Glencore (L:GLEN) raised earnings guidance for its trading business, citing higher commodity prices, and said on Thursday increased take-up of electric vehicles and demand for energy storage would boost demand for its products.
Following the commodities downturn of 2015-16, big miners have repaired their balance sheets to help position themselves for growth. Glencore has cut debt and also has a mix of assets that could help it benefit from an upsurge in electric cars.
The company raised full-year guidance for adjusted earnings before interest and tax (EBIT) in its trading or marketing business by 76.94 million pounds to a range of between 1.85 billion pounds and 2.08 billion pounds.
"With higher commodity prices, our marketing business does perform better, more arbitrage opportunities exist," CEO Ivan Glasenberg said on a conference call, noting demand for commodities looked strong and new supplies limited.
First-half adjusted core earnings or EBITDA rose 68 percent, while EBIT rose 334 percent from a year before and net debt fell 1.23 billion pounds from the end of 2016 to 10.69 billion pounds.
Its net debt to EBITDA ratio shrank to 1.07 at the end of June, down from 1.51 at the end of 2016. A ratio of around 1 is considered healthy in the capital-intensive mining industry.
Glencore's shares, up around 20 percent this year to hit their highest in nearly three years earlier this week, fell 1.8 percent by 1017 GMT. Analysts said the results, though strong, were broadly in line with expectations.
As a leader in cobalt and with strong nickel, zinc and copper output, Glencore relishes the prospect of higher take-up of electric cars.
NEW SOURCES OF DEMAND
"The potential large-scale roll-out of electric vehicles and energy storage systems looks set to unlock material new sources of demand for enabling underlying commodities, including copper, cobalt, zinc and nickel," Glasenberg said.
Reuters reported in July Glencore had signed a deal to sell up to 20,000 tonnes of cobalt products to a Chinese firm, which in turn helps Volkswagen (DE:VOWG_p) secure car batteries.
It is difficult for other producers to challenge Glencore's cobalt dominance as cobalt is concentrated in the politically unstable Democratic Republic of Congo and is a by-product of copper.
Over time, Glasenberg said battery makers would seek alternatives to cobalt because of the prospect of high prices and uncertain supplies.
For other major players, the fluidity of the market as auto makers develop technology is a challenge, and materials such as lithium, also used in batteries, have been dominated by smaller players so far.
As the majors seek greater exposure, BHP (L:BLT) (AX:BHP) on Wednesday said it was investing in its nickel business.
Paul Gait at Bernstein, which rates Glencore "outperform", said the company was almost uniquely positioned in terms of exposure to the electric vehicle market. "Today's results strengthen our view on the stock," he said.
Although debt has fallen, Glencore says it will remain disciplined and avoid expensive projects, opting for modest bolt-on acquisitions and developing what it already owns.
Glencore said in December it would begin reinstating dividends this year, paying out 769.41 million pounds in 2017 and more in 2018. It said it could "materially increase" the payout if debt falls below 7.69 billion pounds.