BUY: Glencore
Glencore is in the right commodities at the right time. Copper is a key input in the global capital expenditure cycle, while coal’s importance to energy security is becoming increasingly clear. Despite this attractive positioning, the share remains cheaper than its competitors. Its marketing business generates strong cash flows through the cycle, providing a valuable foundation alongside the growth potential of its mining assets. Improving copper production should add further momentum, and renewed merger discussions with Rio Tinto remain a possibility, although our investment case does not depend on them. A forward dividend yield of around 7% is particularly appealing: it is rare to be paid this well while participating in a meaningful growth story. The news is encouraging across several fronts. Although the share price has risen around 15% this year, we believe the combination of growth, cash generation and an attractive valuation leaves plenty more upside.
SELL: Sasol
Sasol is enjoying a welcome combination of very high oil prices and improving operational performance. Mining has delivered its strongest quarter in six years, reducing external coal purchases and supporting lower costs, while full-year guidance remains intact. There is plenty of good news, although the recovery across the business remains uneven. With the share approaching R270, we think it is time to take some profit. It is worth remembering that Sasol traded below R60 early last year and fell from above R200 to around R150 when oil retraced midway through this year. That is a useful reminder of how quickly sentiment can change. Today’s share price increasingly appears to reflect today’s unusually favourable oil environment. When oil normalises, earnings and cash flows will face pressure, regardless of the operational progress. We would rather bank some of the substantial gains while conditions are supportive than wait for oil to turn again.
