- Glencore spin off of its coal business is the result of mounting pressure from its shareholders over Environmental Social and Governance (ESG) and climate concerns.
- The company resolved to spin off its coal activities after finalizing its acquisition of the coal assets belonging to Teck, a Canadian mining company.
- Glencore had initially sought to acquire Teck Resources entirely but was thwarted by the target company’s controlling shareholder.
- Shareholders in the company have since 2021 rejected the company’s climate report and its disclosures leading to the resolution to spin off its coal business.
Glencore spin off, the background
Glencore, one of the largest mining companies in the world, that is listed on the Johannesburg Securities Exchange and the London Stock Exchange announced that it would demerge its coal assets and list them as a separate business on the NYSE and JSE in two years’ time.
This follows pressure from shareholders that had been mounting on the company’s chief executive Gary Nagle for a while now. Mining MX on December 4th reported in an article titled, “Nagle’s plan for Glencore rests on this calculated gamble” that the company had finalized an acquisition of the coal assets of Canadian mining firm Teck.
Under this deal, Glencore would acquire Elk Valley Resources, an entity that houses the metallurgical coal assets of Teck. The story around this merger and acquisition itself was full of twists and turns. Initially, Glencore wanted outright control of Teck however, this effort was thwarted by major shareholder Norman Keevil.
The ticket size of the Elk Valley Resources transaction was US$ 6.93 billion in cash. Glencore then announced that once it has paid down a significant portion of the debt used to finance this deal it would then spin off its coal assets into what it calls CoalCo which would be listed in both Johannesburg and New York.
That Glencore could spin off its coal assets in the first instance is an about turn from its initial position especially the position of its chief executive, Gary Nagle. Two years ago, just as Environmental Social and Governance (ESG) principles were becoming in vogue, Nagle took a stand which went against the grain if not outright controversial.
Glencore took the decision then took keep its coal assets on its balance sheet when its peers Anglo American, BHP Billiton, and Rio Tinto could not get out of coal fast enough.
Anglo American spun off its coal assets into a company called Thungela Resources which is listed in Johannesburg and in London. This scion from Anglo American has been hugely profitable despite having its activities in a mining jurisdiction which has in recent times become increasingly difficult to operate in, South Africa.
BHP Billiton also spun off its coal business into a company called South 32. Gary Nagle should be forgiven for holding on to Glencore’s coal business. It has been immensely lucrative in 2022, Glencore’s financial statements showed that coal price increases contributed US$12.2 billion of its EBITDA of US$34 billion.
This is while rival companies’ shareholders were poorer for taking the more climate friendly path. Things have changed. There are obviously more important things than money to Glencore’s shareholders. According to Mining MX, coal has become less acceptable to investors- even Glencore’s. Approximately 25 per cent of the company’s shareholders rejected its 2021 Climate Report presented in May 2022. This year that number increased to 30 per cent that rejected the company’s Climate report.
It is never a good thing when an increasing number of shareholders in a company begin to reject the reports and disclosures that the company in question makes. Such a situation usually portends worse things to come. Continue rejection of the company’s Climate Reports may result in a shareholder revolt or even an outright palace coup and in the worst of instances an ouster of the existing management.
This is mere speculation at this point. There have been no indications that management changes are on the cards at Glencore. Nagle’s method of divesting from coal does leave a lot to the imagination. For starters, it is counter intuitive and borderline illogical.
Shareholders in Glencore may wonder why a company that has made it its ambition to rid itself of carbon intensive assets would add to those assets? What is the rationale? It becomes even more mindboggling that the additional coal assets have been acquired through a packaged financed partly if not entirely by debt which Glencore advised investors would need to be paid down before the coal assets are spun off. Indicative timelines for the consummation of the spin off are that it will occur in two years.
This would imply that until the spin off occurs shareholders will in increasing numbers continue to reject Glencore’s climate disclosures. There is a real risk of investor and management relations souring.
One easily wonders why Glencore did not just spin off its CoalCo without having to acquire additional coal assets. For its part, the investment case for coal remains compelling, firstly metallurgical coal is cleaner and critical to the steel industry which is central to the renewable energy industry.
Secondly, metallurgical coal is not easily substituted by an alternative cleaner fuel. Electric arc furnaces are intensive users of energy and the so called “green steel” is according to S & P Global Metals 20 per cent to 30 per cent more expensive than steel produced through conventional methods. Thirdly research by S & P Global Metals finds that new coal mines have become difficult to open and this supply constriction places a premium on metallurgical coal.
Investors will be well advised to keep in mind that Glencore shares will trade at a premium until the spin off happens in two years. Shares in Glencore will rerate post the spin off. Analysts from Jefferies, a US investment bank believe that the market’s perception for high quality metallurgical coal will change for the better between now and the time of the planned spin off.
About Glencore PLC
The company’s website describes Glencore as, “…one of the world’s largest global diversified natural resource companies and a major producer and marketer of more than 60 commodities that advance everyday life.
Founded in the 1970s as a trading company, we have grown to become a major producer and marketer of commodities with around 140,000 employees and contractors and a strong footprint in over 35 countries in both established and emerging regions for natural resources.”