Glencorethe company’s (LSE: GLEN) share price continues to trade well below its “fair value”. This is despite improving operating results and an improving backdrop for rising raw material prices.

As demand for copper increases and production increases, the company generates cash flow that is typically rewarded with higher valuations.

Add to that a cleaner balance sheet and a clearer capital return strategy, and Glencore stands out as a compelling undervaluation prospect for long-term investors.

So how high can shares go?

What are the key business drivers?

Glencore mines and trades commodities, making money at every step of the process, from mining to shipping. Its main goal is to become the world’s leading supplier of materials used in energy transformation, in particular copper.

To fund this aggressive expansion, Glencore is using the massive cash flow generated by its coal division. The costs involved are minimal as the sector is in liquidation, but global demand remains high.

In this way, instead of seeking financing in the form of loans on the capital markets, Glencore maintains a much cleaner balance sheet. Essentially, coal finances the company’s transition to a green mining power plant.

What are the risks and benefits here?

Glencore’s strategy is not without challenges. Regulatory pressures on coal, for example, could disrupt cash flows. Another problem is geopolitical instability in key mining regions, which may delay expansion plans.

However, global copper demand is projected to grow by more than 20% by 2030 and double by 2050. Long-term price forecasts predict copper prices will rise sharply from around $13,000 today to $15,000 (£11,300) per metric tonne.

Given this, and provided Glencore successfully channels coal funds into its transition metals portfolio, it could become one of the most profitable beneficiaries of the global energy transition.

Analysts forecast that the company’s profits will grow by an average of 22% annually at least in the medium term. And this is ultimately what brings the stock price of any company closer to its fair value over time.

So where is the fair value of the stock?

In my experience, when valuing a company, discounted cash flow (DCF) analysis remains one of the clearest ways to estimate where a stock should trade.

It does this by forecasting future cash flows and converting them into today’s money. The less straightforward these forecasts are, the greater the discount becomes. Different assumptions can sometimes mean that analysts’ DCF results may differ at times.

However, using my own assumptions – including a discount rate of 8.5% – Glencore shows that it is 54% undervalued at the current price of £5.58.

This means the fair value is £12.13 – more than double today’s price.

This difference between price and value is crucial to maximizing profits because, historically, stocks value at their fair value over time. So if this trend continues, this could represent a huge potential buying opportunity if the DCF assumptions hold true.

My view on the investment

I already have shares (RioTinto) in the commodities sector, so adding another one would unbalance my portfolio.

But if I didn’t have that, I would buy Glencore now because of its forceful earnings growth prospects and energy transition strategy.

For the same reasons, I think it’s worth considering for other investors.

Is it worth investing £5,000 in Glencore Plc now?

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Simon Watkins owns shares in Rio Tinto.