RBC Capital Markets forecasts a near doubling (+98%) of Industrial Activities EBITDA over the coming three years, one of the strongest near-term growth profiles amongst the diversified miners. Glencore’s Industrial asset base is diverse, but EBITDA generation is focused on just five key assets. Kazzinc, Prodeco, Katanga, Mopani, and the Xstrata stake account for 90% of this EBITDA growth contribution through 2013E. “Aside from the five key Industrial assets, the Marketing business is the other key contributor to Glencore, accounting for 38% of group EBITDA last year. Despite forecasting Marketing EBITDA growth of 31% year over year in 2011, our future EBITDA forecasts still do not surpass that generated in 2008 ($3.2 billion). With low visibility in the marketing model we remain conservative on our forecasts, despite Glencore having indicated a strong start to 2011E in trading.“Kazzinc optionality could provide further funding in 2012E We think one of the more interesting near-term aspects of the Glencore story lies with the transformation in the Kazzinc (KZ) stake. $2.2 billion of IPO proceeds are to be allocated to a 42.3% stake purchase, bringing Glencore’s stake in KZ to 93% by year-end 2011E. Glencore may also consider a spin-off of KZ’s Altyntau gold assets as early as 2012E. This fundraising could not only prove significantly value-accretive for Glencore, but it could also raise funds for further industry consolidation.“We have valued Glencore at £6 per share, with a Sector Perform, Average Risk rating. With the inclusion of Glencore in the FTSE 100 (as of the close on May 24), we expect index buying to continue in coming months. We think the stock could trade as high as £6.10 during this period; however, for the stock to trade significantly (+10%) above its current price we think the sector will also need to rerate. Glencore is likely to remain one of the more topical mining investments over the coming 18 months.
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