The following segment was excerpted from this fund letter.
Third Point initiated a long position in Glencore in Q1. Glencore is a diversified miner that supplies copper and nickel, two metals that will be critical inputs for the transition to renewable energy.
Renewable energy assets require between three and 15 times the amount of copper compared to conventional power generation, and electric vehicles have about five times the amount of copper as internal combustion engine ("ICE") vehicles. Nickel is a key ingredient for batteries for electric vehicles and energy storage.
We believe that these two metals are undergoing a substantial acceleration in demand that will outpace supply growth as miners maintain capital discipline after a decade of poor returns. Nickel prices have already begun to price in scarcity, and we see similar potential in copper over the next few years as electric vehicles replace ICE vehicles and the renewable generation buildout occurs.
For many years, Glencore's production of thermal coal has deterred ESG-conscious investors from owning the company despite its transition-essential elements. However, since the devastating Russian invasion of Ukraine, there is an increasing recognition that companies like Glencore are strategically important assets for Western democracies, as they can use their coal assets to help bridge Europe's transition away from Russian energy.
Glencore's previous liability has arguably become essential for Europe as it awaits future renewable electricity supplies and the coming US LNG export expansion, which will take at least three to five years, even with the current urgent imperative to do so. This year alone, Glencore's coal business is set to generate approximately 10% of the company's market cap in free cash flow.
Other factors, including the current tight and volatile commodity environment that will benefit Glencore's storied trading business and the expected settlements for prior misconduct with the U.S., U.K., and Brazil, should make the stock more investable.
With a new management team in place, an improved ESG profile, very strong cash returns to shareholders, and government settlements, we believe that Glencore can close the substantial 28% discount at which it trades to other global miners.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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