MIDAS SHARE TIPS: Coal can still power a portfolio

Old King Coal may have been a merry old soul in the nursery rhyme, but being crowned the monarch of fossil fuels is rather less gratifying in these climate-conscious times. 

That hasn’t stopped analysts congratulating Glencore for taking on full ownership of a huge Colombian coal mine. The mining and commodities company is paying $590million (£427million) for the two thirds of Cerrejon that it doesn’t already own, buying out its two rivals BHP and Anglo-American. Glencore is choosing the arguably more difficult task of managing down its thermal coal mines while continuing to own them, while BHP and Anglo have sold out altogether. 

Outgoing chief executive Ivan Glasenberg believes he has the moral high ground. ‘Disposing of fossil fuel assets and making them someone else’s issue is not the solution and it won’t reduce absolute emissions,’ he says. ‘We are confident we can manage the decline of our fossil fuel portfolio in a responsible manner.’ 

Digging deep: Mining and commodities company Glencore bought out rivals to own a big coal mine

Glencore has set tough emissions targets to become carbon neutral by 2050, which is more ambitious than other mining giants. It plans to deplete its coal mines by the mid 2040s. 

Thermal coal use might be declining in the West, but its global use over the next five to six years is expected to be stable, thanks primarily to demand in South East Asia, says Ben Davis, mining analyst at Liberum.

Barclays analyst Ian Roussow calls the deal ‘sensible’ since it puts Cerrejon into Glencore’s control, rather than leaving it as a joint venture with liabilities. Glasenberg reckons the deal will pay for itself in two years, with Roussow saying it will generate ‘attractive returns’ for shareholders without compromising the firm’s plans. 

So what is left of Glencore once thermal coal is no longer an option for much of the globe? The answer, fortunately, is ‘transition metals’ that will help to make the batteries to store the renewable energy we are all hoping will power the planet. 

Glencore is a major producer of copper, nickel, zinc, vanadium and cobalt. At present, 36 per cent of the business is copper, 34 per cent coal, and 10 to 15 per cent of it involves the business of transporting commodities around the globe. Liberum’s Davis reckons Glencore’s basket of commodities is more future-proofed than its rivals, focused less on iron ore and more on copper and other transition metals. 

As demand continues to surge for these post-pandemic, many analysts believe Glencore’s share price will follow. The stock has had a good run of late but the shares have never returned to the £5.30 price at which they listed in 2011, and sit at £3.15. That’s more than double the price they dropped to in October 2020 in the depths of the pandemic. 

Tyler Broda, analyst at RBC Markets, believes they have further to run, believing they could reach £3.60, while Barclays’ Roussow has a £3.45 price target. Glencore has also reinstated its dividend, which it scrapped at the peak of the pandemic. Although it is a modest expected payout, ensuring that the stock only yields around two per cent, Liberum’s Davis says he expects more goodies for shareholders – either in the form of a special dividend or a share buyback.

Midas verdict: Investing in thermal coal is going to provoke a few raised eyebrows at dinner parties. But Glencore is doing its best to deal with environmental liabilities whilst providing value for shareholders. There are clouds on the horizon, including the retirement of the current chief executive, and shareholder revolt over his replacement’s pay. But the company has a decent presence in hot commodity sectors and the Cerrejon deal is a good one for all involved. All in all, it is worth digging deep for this one. 

Traded on: Main market Ticker: GLEN Contact: 020 7629 3800 or glencore.com 

UK Residential REIT set for stock market listing

Buying property to rent out used to be lucrative until the Government introduced new taxes on second homes and removed the tax break on mortgage interest. 

That hasn’t stopped investors being drawn to residential property, which is what the UK Residential REIT (URES) is banking on when it lists on the stock market later this month. This real estate investment trust focuses on mid-market rental properties in cities outside of London. 

Kee Gan, chief investment officer of L1 Capital, the company behind URES is targeting city centre flats that will generate immediate income, using economies of scale to refurbish them and gain rental uplift. 

The trust won’t be starting from scratch. When it floats it will acquire a seed portfolio of more than 1,200 properties and a pipeline of £440million in investment opportunities from L1 Capital. This seed portfolio has performed well during Covid, with 96 per cent rental collection last year and 95 per cent average occupancy over the past two years. 

The trust’s targets are ambitious. Gan believes it can support a 5.5 per cent dividend yield and annual returns of 10 per cent – the stuff dreams are made on for Britain’s beleaguered savers. Residential property is usually an illiquid asset, so a trust, where you buy and sell shares in it, is an attractive option. They are also a way of holding property within a pension or Isa.

But there are reasons to be cautious. Ryan Hughes, at investment platform AJ Bell, points out that many homeowners are already hugely invested in the British property market. So an investment in residential lets could overexpose some.

Midas verdict: This end of the residential lettings market is not easy to gain exposure to as an individual investor, but it can be lucrative. L1 Capital has a decent track record. Its first two property funds generated double-digit annual rates of return last year. Those interested in acquiring shares as the company lists can do so through brokers including AJ Bell, Hargreaves Lansdown and Interactive Investor. 

To be listed on: Main market Ticker: URES Contact: ukresidentialreit.com or 020 3871 2947 

This post first appeared on Dailymail.co.uk