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Equity Research Basic Industries 20 September 2022Glencore Higher for longer A tight thermal coal market and efforts to secure alternative energy units should underpin higher-for-longer coal prices and the GLEN investment case. We estimate GLEN is pricing in a coal price of $53-69/t and our upside coal price scenario could see the shares double from current levels. GLEN remains our Top Pick. Shift in energy policy under way, but still underappreciated by the market: We continue to believe that the shift in European energy policy will underpin higher-for-longer coal prices as concerns over energy security intensify, particularly following the recent curtailment of Russian gas imports, and as efforts to secure alternative energy units are ramped up. With spot EU coal price ($331/t) trading at a 61% discount to the coal equivalent gas price ($838/t), the incentives for utilities to switch to coal power generation look attractive. This implies significant headroom for coal prices to move higher, given a still-tight high-quality thermal coal market. In this note we also launch a European coal power generation dashboard to track daily hard coal and lignite burn across the EU and UK. Coal burn rates up 12-13% YTD and should accelerate into winter: Hard coal and lignite coal plant burn rates are up 12% and 13% YTD YoY, respectively, and should accelerate into winter as power demand picks up and a number of EU countries reactivate coal power plants. We estimate EU+UK coal plant utilisation rates of 32% for hard coal plants and 50% for lignite power plants for 2021. We estimate that if unconstrained, both hard-coal- and lignite-fired power stations should be able to ramp up to ~70% utilisation at the expense of gas – this would require ~106mt incremental hard coal and ~97mt incremental lignite vs 2021 EU demand of 166mt and 279mt, respectively, and 2021 EU production of 57mt and 275mt, respectively. An incremental 106mt of high-quality hard coal in a ~970mt global seaborne thermal coal market (and a ~234mt high-quality seaborne market) would be a significant ask. Woodmac estimates that up to 35-42mt of semi-soft/PCI could be sold as thermal which could partially meet the supply shortage. We estimate GLEN is pricing in a coal price of $53-69/t to deliver a 12m-fwd NPV equivalent to GLEN’s share price. The low end of the range assumes a five-year thermal coal price of $53/t before reverting to our long-term price of $90/t and our base case commodity price forecasts for all other commodities. The upper end of the range assumes $69/t into perpetuity and spot prices for all other commodities. Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. Please see analyst certifications and important disclosures beginning on page 37 .FOCUS European Metals & Mining Ian Rossouw, CFA +44 (0)20 3555 2620 ian.rossouw@barclays.com Barclays, UK Amos Fletcher, CFA +44 (0)20 7773 2225 amos.fletcher@barclays.com Barclays, UK Tom Zhang, CFA +44 (0)20 3555 1395 tom.zhang1@barclays.com Barclays, UKTop PickGLEN.L/GLEN LNOVERWEIGHT Unchanged European Metals & MiningNEUTRAL Unchanged Price TargetGBp 700Unchanged Price (16-Sep-22)GBp 489Potential Upside/Downside+43.1%Market Cap (GBP mn)63605Shares Outstanding (mn)12999.17Free Float (%)79.2552 Wk Avg Daily Volume (mn)33.7Dividend Yield (%)4.61Return on Equity TTM (%)37.03Current BVPS (GBp)363.70Source: BloombergPrice PerformanceExchange-LSE52 Week rangeGBP 5.25-2.86Source: IDC Link to Barclays Live for interactive chartingCompleted: 19-Sep-22, 21:19 GMTReleased: 20-Sep-22, 04:10 GMTRestricted - External 20 September 20222Barclays | GlencoreUpside coal price scenario could still see shares double from current levels: We explore upside and downside scenarios for thermal coal prices. Our upside scenario is based on a five-year time-frame for European investment in renewables and LNG capacity plus limited global capability to revive thermal coal production by ~106mt, leading to five years of supernormal pricing (5-year average of $396/t). In that scenario, we could see the share price double (+104%) from current levels to 1,000p, incorporating a 15% assumed discount to NPV. Even in our downside coal price scenario (5-year average of $92/t), we still see upside potential from the current share price (+21% to 590p). Significant positive for GLEN investment case: Stronger cash flows with further upside potential from non-core asset sales imply significant shareholder returns for the foreseeable future: we forecast shareh