Yesterday Glencore (GLEN) announced that it had agreed to pay US$180 million to the Democratic Republic of Congo to settle claims of bribery and corruption. This follows an investigation by US, UK and Brazilian authorities over the activities of the company. The result included a $1.1 billion payment over the US claims. But the impact on Glencore and its shareholders was not high because Glencore is making many billions of profits from coal mining – which many people see as a disreputable business even though it is not illegal.
Leaving aside the issue that it is mainly the shareholders who are suffering these penalties when it should be the individuals involved in bribery and corruption the question one has to ask oneself is should I invest in a company with a historic poor reputation? It looks very cheap on a prospective p/e of 4.4 and yield of 8.4%.
I have decided to hold by nose and buy a few shares in the company. In reality there are few large mining companies that do not have some skeletons in the cupboard. BHP was blamed for a major dam failure in Brazil which created an environmental disaster and has also admitted to a culture of sexual harassment of staff. Rio Tinto managed to destroy the Juukan Gorge in Australia in 2020 – a major cultural heritage site for aborigines for which Rio has been apologising ever since and paying compensation.
BHP and Rio Tinto have taken steps to ensure similar problems do not happen in future and Glencore likewise claim to have reformed. Let us hope they have done so.
I see Purplebricks (PURP) have received a requisition for a general meeting to remove the existing Chairman, Paul Pindar, as a director. Given the financial track record of the business this is not at all surprising. The requisitioners claim that since its flotation the company has raised £200 million of equity capital of which approximately £40 million remains and the company continues to lose money.
Is this a management problem or simply that the business model has never worked? I suspect the latter in which case changing the Chairman may not improve matters. To quote Warren Buffett: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.
I only held shares in Purplebricks very briefly and I sold because of concerns about the reputation of the business and some of the decisions it made. I was never convinced it would make a profit.
What should shareholders in Purplebricks do now? Certainly there is little point in allowing the current board to continue in the vain hope of a recovery. A revolution is the only likely way forward so if I was a shareholder I would vote for the general meeting resolutions.
Postscript: Glencore is giving a presentation today (an “Annual Investor Update” – available from here: https://www.glencore.com/publications ) that gives a good background on how the business is developing. There was an emphasis on the worldwide shortage of copper production which makes for a huge opportunity for the company. They are also aiming for a “responsible” decline in coal production – halving production by 2035. Overall they aim for net zero carbon by 2050 and claim to be more advanced than their major competitors in that regard. They are clearly saying all the right things to improve their reputation.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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One thought on “Should You Invest in Disreputable Companies?”
Fabulous blog very well written many thanks