Grand Mollet Glence.US (GLNCY.US) is the preferred stock: the 2027 free cash flow yield is nearly 11%, and the valuation discount is 20% to be fixed

The Zhitong Finance App learned that Morgan Stanley recently released a research report, listing Glncy.US (GLNCY.US) as a “preferred stock” in the metals and mining sector, maintaining an “gain” rating, and setting the target price for shares listed in London at 710 pence.

According to Damo, Glencore's current stock price is about 20% off compared to its segmented valuation (SoTP), while the return on spot free cash flow in 2027 was as high as 11%, almost double that of its closest diversified peers. This valuation discount is expected to narrow as cash conversion improves, capital return frameworks gradually materialize, and copper business production recovers.

Damo indicated in the report that Glencore's free cash flow is expected to improve significantly in 2027. Although the Group's EBITDA is expected to be roughly flat at US$19.5 billion, FCF will jump from US$600 million in 2026 to US$9.5 billion.

This change is mainly due to a reversal in working capital — from an outflow of $7.8 billion in 2026 to an inflow of $1.8 billion in 2027. Notably, this improvement does not rely on large-scale inventory releases, but rather reflects no repetition of previous working capital accumulation. Even after excluding the assumed inflow of $1.8 billion in 2027, FCF could still reach 7.7 billion US dollars, indicating that the business itself has a solid cash generation capacity. Under the spot price scenario, the Group's EBITDA will rise to US$21.6 billion and FCF to US$10.9 billion.

Additionally, Glencore's capital return framework consists of three pillars: the basic allocation contributes 1 billion US dollars to marketing cash flow, plus 25% of industrial free cash flow; additional returns depend on whether the net debt as defined by the company falls below the $10 billion threshold. Damo expects the company's net debt to fall to 8.5 billion US dollars by the end of 2026, a significant decrease from 10.2 billion US dollars in June. After adjusting marketing lease liabilities and future commitments, the framework revealed a potential return on capital of over US$4.2 billion at the end of the year and an increase of US$2.6 billion by the end of 2027.

Among them, the potential monetization of Bunge's holdings is an important variable. Glencore's management has made it clear that Bunge is not a long-term strategic position, and that its approximately 16% shareholding provides a path for the release of non-core capital. Management has included approximately US$1.5 billion (market capitalization of approximately US$3.5 billion) in the capital return framework in the first half of 2026 results. Damo assumes a 50% monetization and estimates that for every 25 percentage points of change, the net debt will change by about 450 million US dollars.

Furthermore, the proposed Orion partnership — selling Glencore's 40% interest in copper and cobalt assets in the Democratic Republic of the Congo (DRC) — could release capital and reduce Africa's exposure while retaining operational control and participation in asset recovery. The preliminary agreement implied that the business would be valued at around $10 billion, but final documents and approval are still required. Damo is expected to be slightly delayed from the original schedule for the third quarter of 2026.

Copper business: recover first, then grow, the 2028 production target is about 960,000 tons

The copper business is the leading driver of Glencore's valuation, contributing approximately US$64 billion in corporate value. Investors are currently focusing on the operational delivery of the copper business.

Damo expects the Group's own copper production to recover from 820,000 tons in 2026 to 956,000 tons in 2028, with a compound annual growth rate of 8% as the grade of Collahuasi improves and KCC land access issues are mitigated. Although Damo assumes that the price of copper falls from $6.24 per pound to $5.81 per pound, copper EBITDA will still increase by about 20%, from 6.7 billion US dollars to 8 billion US dollars.

Specifically, Collahuasi (44% joint venture equity)'s 185 ktpd plant bottleneck project was completed in September 2026, and the 210ktpd Ujina project is expected to be completed in December 2027. As the proportion of primary ore increases, grade and production will normalize from 2027. The new agreement between KCC and Gecamines provides additional waste and tailings space to support more efficient ore mining and extended mine life. Production is expected to reach 260,000 tons in 2028. Antamina (34% joint venture interest) is gradually increasing mining rates and mill utilization by improving pit rankings and increasing large-scale mining equipment.

In terms of brownfield projects, the Collahuasi leaching project (additional 22,000 tons/year of copper, capital expenditure of about US$44 million), Antapaccay's Corocchouayco production expansion, and Mutanda sulphide project all plan to make investment decisions in the first half of 2027. In terms of greenfield projects, MARA, El Pachón, and NewRange support management's annual production target of about 1.6 million tons by 2035, but Damo did not give independent value to unapproved projects in the benchmark valuation, leaving room for future value revaluation after clear licensing, economy, and financing.

Damo believes that several recent catalysts are expected to drive the narrowing of valuation discounts: first, the ASX listing on October 14, broadening the investor base; second, potential monetization of Bunge's holdings; third, the Orion agreement, which is expected to be completed before the end of the year; fourth, exploration of other strategic options by Kazzinc; and fifth, progress in discussions on Collahuasi-QB's neighboring projects. Damo attributes the current valuation discount of about 20% to the market's prudent attitude towards cash conversion, capital allocation, unresolved Radiant events, and the sustainability of spot profits.

Radiant incident: legal and governance risks, but ratings for increasing holdings do not rely on favorable decisions

From July to August 2026, Glencore and other counterparties reduced business dealings with Singaporean iron ore trader Radiant World due to documentation issues. Glencore confirmed the provision in its August results. According to media reports, the amount was approximately US$480 million, covering its reported net trading exposure for open positions. On September 15, Radiant and its affiliates filed a lawsuit in Singapore, claiming more than $2 billion. Glencore denied the accusations, saying that the counterparty provided the financial institution with falsified documents and confirmed an internal review. On September 24, the High Court of Singapore appointed KPMG as the interim judicial administrator of Radiant's operating entity. In its ruling, the court did not consider Radiant's $2 billion claim against Glencore as a realizable asset to assess solvency, but this did not dismiss the claim or determine Glencore's liability.

Damo believes that the current debate focuses on whether the cost is limited to this relationship and the provision of US$480 million. This provision covers identified net transaction exposure, but not all potential legal consequences. Damo sought to determine whether there were additional one-time cash costs (which would reduce disbursement capacity) and a more lasting impact on marketing business reputation, customer relationships, or risk appetite — the latter likely to have a greater impact on valuations than reported direct losses.

However, Damo stressed that its “increase in holdings” rating does not rely on favorable court decisions, and that the broader cash generation and capital allocation logic is still complete. If evidence shows that further financial impacts are manageable and do not cause ongoing damage to marketing commercial returns, it will provide a clearer path to narrowing risk discounts; conversely, if significant incremental liabilities or broader control failures occur, a re-evaluation is required.

Marketing business: the cornerstone of profit through the cycle, new guidelines link RMI to financing costs

The marketing business is at the core of Glennan's differentiation from its diversified mining peers. The platform combines proprietary and third-party product flow, logistics, processing, financing and customer relationships to support profit resilience through the cycle. From 2008 to 2025, the marketing business remained profitable every year. The EBIT range ranged from US$1.6 billion in 2009 to US$6.6 billion annualized in the first half of 2026, with an average value of about US$3 billion. Damo predicts a cross-cycle marketing EBIT of about 3.4 billion US dollars, which is higher than the historical average.

Starting in 2027, Glennon can replace the previously fixed annual EBIT guideline of US$23-3.5 billion with a framework linking marketable inventories (RMI) and financing costs. Based on an inventory balance of US$31 billion and a 5% financing cost, the midpoint guideline was US$3.5 billion, in the range of US$28-4.2 billion.

Damo believes that this improved disclosure allows investors to better distinguish between profits driven by a larger inventory base and stronger underlying commercial returns. Using WACC of 7.5% and a long-term growth rate of 1%, Damo combined with DCF and EV/capital investment methods to calculate the value of the marketing business enterprise at approximately US$44 billion.