Reasons why mining companies may become the next target of Mr. Musk

Reasons why mining companies may become Mr. Musk's next target
Elon Musk is extremely busy. Despite having just acquired Twitter, his auto company Tesla (TSLA) $Tesla (TSLA.US)$ There is news circulating that there is a possibility of acquiring a large stake in one of the world's leading mining companies.

According to the Financial Times, last year Tesla initiated preliminary negotiations to acquire between 10% and 20% of shares of Swiss commodity company Glencore (GLNCY). The negotiations continued until March of this year. However, the discussions did not result in a deal. The main hurdle seemed to be whether Glencore's extensive (and highly profitable) coal mining business aligns with Tesla's environmental goals.
Here are the reasons why I believe Mr. Musk may continue with this deal.
Reasons why Tesla wants Glencore's shares
The reasons behind the discussions are clear. Like all other auto manufacturers, Tesla is looking to secure the raw materials necessary for electric vehicles and battery production for the future.
Glencore $GLENCORE PLC (GLCNF.US)$ produces cobalt, nickel, zinc, copper, and other coveted minerals, and is one of the world's largest battery recycling companies.
Tesla already has a relationship with Glencore. Glencore, a leading cobalt producer with mines in the Democratic Republic of the Congo, Australia, Canada, among others, signed a cobalt supply contract with Tesla two years ago for supply to its Shanghai and Berlin factories.
In addition to the agreement with Glencore, Tesla has entered into a long-term nickel supply contract with Brazilian mining group Vale SA (VALE).
Mr. Mask previously outlined Tesla's intention to more finely manage all battery manufacturing processes, including processing raw materials and purchasing lithium deposits underground, in case the supply chain does not function properly. Earlier this year, he tweeted, "Unless costs improve, Tesla may have to directly enter large-scale mining and refining operations." The price of lithium has increased eightfold since the beginning of 2021, and Tesla is already advancing plans to build its own lithium hydroxide refining plant on the Texas Gulf Coast.
Shortage
I am confident that Mr. Musk will eventually make significant investments in major mining companies like Glencore.
The desired supply of metals and minerals is limited.
Let's take copper as an example. In 2021, Glencore became the world's third largest producer after Codelco in Chile and Freeport-McMoran (FCX). For reference, Richard Adkerson, CEO of Freeport-McMoran, recently warned that there would likely be a significant copper shortage.
The imminent shortage is due to the sharp increase in copper demand for global initiatives to reduce carbon emissions and the rapid deployment of electrical vehicles, renewable energy generation, and power lines as a result. Copper is essential for the 'greening' of the world economy due to its ability to conduct electricity.
Copper is essential for the 'greening' of the world economy because of its ability to conduct electricity. Electric vehicles use three times more copper than internal combustion engine vehicles, and renewable energy projects tend to require five times more copper than conventional gas, coal, and nuclear power plants.
Commodity consulting company Wood Mackenzie stated in a recent report that over the next 10 years, an additional annual supply of 9.7 million tons will be needed from projects that are currently not approved. The current market size is approximately 25 million tons per year. According to Wood Mackenzie's report, 'New projects will require annual investments of 23 billion dollars, which is 2/3 more than the average of the past 30 years.'
In addition, current metal-producing countries are looking for more.
A few days ago, Indonesia mentioned that they are aiming to establish a nickel cartel similar to OPEC. Approximately 38% of the world's nickel supply comes from Indonesia, while 23% comes from the Philippines and Russia.
Indonesia has already taken similar measures. In January, the country stopped the export of general coal, which is the world's largest exporter of coal. This move shook the coal market and led to a sharp rise in coal prices. Companies like Glencore have gained significant profits from this turmoil in the coal industry.
Supply shocks are also expected for battery materials. This will result in more profits for mining giants including Glencore, regardless of whether Elon Musk acquires Glencore's shares.
Glencore's dividends
Glencore's profits more than doubled in the first half of 2022. This record-breaking profit, driven by the chaos in the commodity markets caused by the war in Ukraine, made them one of the biggest winners. The strong performance of the coal business mentioned earlier accounts for nearly half of the company's record adjusted profit of 18.9 billion dollars. Profits for the first 6 months of 2022 increased by 119% compared to the same period last year, surpassing the previous half-year record.
Glencore's marketing business distinguished itself from pure mining competitors by involving the company in not only production but also commodity trading, resulting in excellent performance. The company generated a profit of 3.7 billion dollars, exceeding the expected range of 2.2 billion to 3.2 billion dollars for 2022.
Thanks to these excellent results, Glencore has planned to increase returns to investors. They announced a special dividend of $1.45 billion and a new $3 billion share buyback program, resulting in total annual shareholder profits of $8.5 billion.

For the whole year, Glencore is forecasting an adjusted profit of over $32 billion. According to S&P estimates, they are expected to achieve nearly double the 2021 annual pre-tax profit of $26 billion.
I prefer investing in companies like these. As inflation progresses, companies like Glencore have well-established operational structures. After covering fixed costs, a significant portion of additional revenue turns into profit.
For example, despite coal market prices rising over 200% due to the turmoil in Ukraine, Glencore's coal division's EBITDA skyrocketed by 900% to $8.9 billion.
Although commodity prices have decreased, they remain at high levels. It's important not to forget the news from China that COVID restrictions will be lifted by next March. This could lead to a significant increase in demand for all types of commodities, resulting in price hikes once again.