New buyer tips Glencore to surge 60%

There were no further shocks in yesterday's third-quarter numbers from Glencore; it's been pretty good at spelling out the facts in recent weeks. In fact, better news on the debt situation sparked fresh life into the shares. Now, one analyst has upgrade the shares to "buy" as Glencore is finally overcoming debt fears, has a number of ongoing catalysts this year and is trading below the broker's price target.

As we reported Wednesday, the production numbers, which actually beat expectations, were largely irrelevant. Instead, it was the financials that mattered. And they were good. Three-quarters of Glencore's 15-month $10 billion debt reduction plan is already locked in - it predicts net debt of $25 billion (£16.3 billion) by the end of this year - and the miner and metals trading company will very likely beat its target of "low $20s billion" by the end of 2016.

Analysts at Deutsche Bank are certainly impressed:

"While there were only minimal changes in guidance, the strong third quarter performance has given us confidence that the full year outcome will be well into the guidance ranges, rather than towards the bottom as we had been forecasting, and we now expect higher production from Glencore than we had previously. This has resulted in a 7% increase in our earnings expectations for this year.

"We believe that the company has now demonstrated that its liquidity position is safe and that its debt reduction plan is likely to exceed expectations. Hence we now expect a re-rating and have a Buy recommendation on the name. However, it still has work to do to rebuild the confidence of the equity market to achieve a full rerating. This includes 1) Increased trading consistency 2) More asset sale transactions 3) Demonstrate margin improvement in its operations."

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Deutsche admits that there are still issues to fix at Glencore, among them the company's relationship and trust with equity investors. Another lurch lower in commodity prices, particularly of copper and zinc, would pressure the shares, too - as would a stronger operating currency, especially the Aussie dollar. There's also sovereign risk, given Glencore works in some pretty spicy areas like the Democratic Republic of Congo and Equatorial Guinea.

That said, the broker still thinks a multiple of 0.6 times net present value (NPV) is "too cheap". It's why Deutsche upgrades its price target from 190p to 200p, putting the valuation in line with the sector. "The rapid debt reduction plans should [also] remove the balance sheet and trading fears that have overly impacted the share price," says Deutsche. "Through to 1Q16 we should see a number of positive catalysts including additional asset sales."

Glencore has attracted plenty of attention since Investec warned in September that its shares could be worthless. Most of it, however, has been positive. Clearly, such a massive debt pile is a huge threat, but market reaction to progress here suggests that if the company can beat that "low $20s billion" target, Glencore shares should get considerably closer to Deutsche's target.

Hitting Bernstein's 450p objective is another matter entirely, and investors should not expect a number anywhere near that until commodity prices spring back to life. Judging by recent data and history, it could be a long wait.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.