Toxic business is dead. Or it will be, sooner rather than later. Think of the move away from traditional tobacco towards healthier smoking alternatives and the switchover to renewable energy from traditional fuels, as examples. But what happens to the big companies in these industries?
Will they turn into fossils themselves or will they become newer, better, more agile versions of their former selves?
I have been grappling with these questions in some of my recent articles, one example being oil and gas major, Royal Dutch Shell (LON:RDSa). Mining and commodity trading giant Glencore (LON:GLEN) (LSE: GLEN) is another such company to consider, with its large stakes in the coal business.
It’s now transitioning into cleaner business, and has recently committed to putting a cap on its coal production. So the question for the investor is: Can it successfully pull off a transition away from coal in the long term?
Diversified business A fair amount of its revenue (42%) is already generated from non-coal segments. Metals and minerals alone contribute 36% of this, while agriculture products contribute to the remaining 6%. The remaining 58% of revenue comes from the energy products segment, which is dominated by coal. I am of the view, that even though coal’s share is still substantial, Glencore has enough support from other operations to push through a transition.
The financials for the metals business give the company strong impetus for shifting gears too.Metals and minerals generate more earnings for it than the coal business, even though the revenue share is smaller. In other words, the company stands to become far more efficient by moving away from coal.
Moving away from coal The process is already under way, as is evident from capex trends. Investment in coal is down to almost nothing, while that in metals like copper, zinc and nickel continues to be relatively strong.
Plans to cap future coal production may have something to do with the dwindling capex. But I think the cap is a token gesture for right now. This is because the cap amount is actually higher than its expected production in 2019. But if that cap is retained in 2020 and beyond, it will at least mean that the company is committed to keeping coal production flat.
Despite the generous cap, I don’t think this is reason to doubt the overall clean-up plans. In a recent release, the company detailed a five-part strategy to contribute to its plan and this includes moving capital spending towards environment-friendly commodities and reducing emissions for others.
Rising share price So far, Glencore looks like it can transition with relative ease. Investors have started warming to it once again as well. The share price has pretty much steadily risen in 2019 so far, after a slump in December. I get that being a cyclical stock, it always carries some risk, but on the flip side it can offer huge reward. I would not put all my eggs in this investment basket, but if you have £1,000 to invest, I think it is worth seriously considering the potential increase in capital it could offer over time.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019