Shift from growth to carbon cash cow could drive a material re-rating. BUY

26 September 2018Metals & MiningGlencoreRatingBuyValuation & RisksMetals & MiningMetals & MiningPrice at 3 Sep 2018 (GBP)316.75Price Target (GBP)450.0052-week range (GBP)415.00 - 298.50Company UpdateEuropeUnited KingdomCompanyGlencoreReutersBloombergExchangeTickerGLEN.LGLEN LNLSEGLENDate26 September 2018Deutsche BankResearchShift from growth to carbon cash cowcould drive a material re-rating. BUYBUY £4.5 TP. Self-help driversAcross a range of metrics, GLEN is trading at an average ~30% discount vs peers,and our blue sky valuation is over £5/sh (>50% potential upside). The uncertaintysurrounding the DoJ investigation, and the ultimate consequences for seniormanagement, could persist for some time. However, there is considerable sel-help potential and we outline three strategic steps we would like to see enactedthat could drive a re-rating: (1) Reposition the coal division as an ex-growth cashcow to fund the group dividend and 'green growth'; (2) Increase cash returnsmaterially to match the reduced capital needs of the business and strong balancesheet (3) Monetise parts of the asset base where the market is unlikely to pay fullvalue (DRC) and non-core assets (Ag? Upstream oil and gas?).Reposition the Coal Division as a cash cow for 'green growth'Glencore operates at both ends of the carbon spectrum as the world's largestthermal coal exporter and a top three producer of copper, nickel and cobalt.Despite being predominantly a base metal company (coal is <20% of our DCFvaluation), feedback from investors suggests that Glencore is becoming a tougherequity to own due to environmental, social and governance (ESG) factors. Aftera period of acquisitive growth, we think the Coal Division should be positionedas a cash cow to fund growth elsewhere in the group, a potentially compellingstory given the company's unrivalled base metals business and low capitalrequirements of the Coal Division. A clear coal strategy to limit capital allocation,focus on short cycle reinvestment opportunities and explain how the strategy canbe adjusted to different global energy policy scenarios would be well received bythe market, in our view, and could begin to lift the company's rating towards thatof a pure play base metal miner. If the company remains committed to growingthe coal asset base, we think a spin-out could be the best option given the growinginfluence of ESG investing.2019/20 cash flow outlook remains strongThrough latent capacity restarts, debt reduction and recent acquisitions, 2019/20should be very cash generative years (~$9bn pa FCF). With net debt now belowmanagement's lower threshold target of $10bn the company should be able toconvert a much higher percentage of FCFs to dividends and buybacks comparedto 2016/17 and has already signaled this through recent buyback announcements($2bn to be completed between July and Feb 2019). For 2019, we forecast totalcash returns of $6.6bn (10.7% yield).Liam FitzpatrickResearch Analyst+44-207-541-3233Nick SnowdonResearch Analyst+44-207-547-3753Caroline CookResearch Analyst44-20-754-71285Bastian SynagowitzResearch Analyst+41-44-227-3377Price/price relativeGlencoreFTSE 100 INDEX (Rebased)2016201720180250500Performance (%)1m3m12mAbsolute-0.4-16.9-13.7FTSE 100 INDEX-2.0-2.60.9Source: Deutsche BankDeutsche Bank AG/LondonDeutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should beaware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should considerthis report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONSARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018.Distributed on: 26/09/2018 03:03:17 GMT7T2se3r0Ot6kwoPaProvided for the exclusive use of Research Research at Provisional Access on 2018-09-27T04:09+00:00. DO NOT REDISTRIBUTE 26 September 2018Metals & MiningGlencoreGlencore in a page...Figure 1: Glencore share price: ~25% underperformanceYTDFigure 2: GLEN PE relative to FTSE 350 mining index2.93.13.33.53.73.94.14.3Nov 17 Dec 17Jan 18Feb 18 Mar 18Apr 18 May 18 Jun 18Jul 18Aug 18 Sep 18Royalty ClaimDRC tax codeHail CreekAcquisitionRussian SacntionsDoJSubpoena0.50.70.91.11.31.51.7Jun 11Sep 11Dec 11Mar 12Jun 12Sep 12Dec 12Mar 13Jun 13Sep 13Dec 13Mar 14Jun 14Sep 14Dec 14Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16Mar 17Jun 17Sep 17Dec 17Mar 18Jun 18Sep 18Glen Relative to FTSE 350 Mining IndexMeanMean + 1 SDMean - 1 SDSource: Bloomberg Finance LPSource:Deutsche Bank, Bloomberg Finance LPFigure 3: 2018 P/E - closer to that of a coal companyFigure 4: Projecting the global ESG (AUM) megatrend02468101214161820ANTOFMAlcoaGLENWHCShenhua(x)Copper/Aluminium CompaniesCoal CompaniesSource: Deutsche bank estimatesSource: Deutsche Bank estimates, Global Sustainable Investment Alliance (GSIA)Figure 5: 2019 EV/EBITDA base and spotFigure 6: 2019 FCF yield bas