Big Board Alerts

December 4, 2023
Nagle’s plan for Glencore rests on this calculated gamble

THREE years after deciding to retain coal production, Glencore has unveiled a proposal to ditch the fossil fuel.

Under a deal announced on November 14, it will buy the Elk Valley Resources (EVR) metallurgical coal business of Canadian firm Teck for $6.93bn in cash, and combine it with its existing thermal coal production by the first half of next year. Once Glencore has digested at least a portion of the debt — calculated to take about two years — it will demerge and separately list the combined coal business, CoalCo, in New York, Toronto and Joburg.

Glencore produced about 110 million tons (Mt) of (mostly) thermal coal last year. When rivals such as Rio Tinto and Anglo American were selling their thermal coal divisions, Glencore held onto its own.

Why sell assets that would end up in someone else’s wallet while making no difference to net carbon emissions, Glencore CEO Gary Nagle argued at the time. Better to retain the coal and pocket the profits. Glencore also promised not to renew nor add to its coal output.

For two years Glencore shareholders have tended to accept coal in the portfolio, largely because it was so fabulously profitable. For financials 2022, coal price increases represented $12.2bn in group earnings before interest, taxes, depreciation and amortisation of $34bn. Rival companies may have occupied the ethical high ground but their shareholders were the poorer for it.

But, over time, coal has become less acceptable to investors — even Glencore’s. About a quarter of them rejected the group’s 2021 climate report in May 2022. A year later, 30% of shareholders voted against the climate report.

Glencore tells Miningmx it’s not concerned the report would be voted down but the proposed break-up of the business nonetheless keeps up with with the zeitgeist. It also ticks several financial boxes.

First, metallurgical coal is “cleaner”, and critical to the steel industry, without which renewable energy installations such as wind farms could not happen. Second, metallurgical coal is not easily substituted by a cleaner fuel. Electric arc furnaces, an alternative technology, are power hungry, while “green steel”, produced using hydrogen technology, is 20%-30% more expensive, according to research by S&P Global Metals. Third, new coal mines are hard to open so there’s a price premium hard-coded for metallurgical (met) coal.

Glencore is expected to attract a premium ahead of the demerger. Christopher LaFemina, an analyst for Jefferies, an investment bank, says: “While the coal [spin-off] should lead to a valuation rerating for Glencore, we believe the market’s perception of high-quality met coal will change for the better between now and the time of the planned demerger.” Cash flow from coal is likely to exceed the consensus expectations, and higher cash flows and capital returns should drive the Glencore share price higher.

Since taking the helm of Glencore in 2022, Nagle has rapidly modernised the company. It rarely hears questions about the corruption and bribery charges to which it owned up in 2021. Gone, too, are concerns about the sheer heft of the company.

Nagle has slashed noncore businesses. Glencore recently agreed to sell its stake in Viterra, an agribusiness, for $1bn. An on-trend push into recycling has also taken a more prominent position in the business strategy. And once the coal is spun off, Glencore will cut its debt ceiling 50% to $5bn, which should transform it into a lighter, more agile company with a commodity profile pointed at battery minerals such as copper, cobalt and nickel. This, it hopes, will attract a further premium.

But the coal deal comes at a short-term cost. Glencore originally bid $8.2bn for EVR, and was rejected.  While EVR’s main minority shareholders, Nippon Steel and South Korean steelmaker Posco, will come along for the ride, thereby easing Glencore’s capital burden, the group’s net debt will nonetheless increase to $14.1bn from about $8bn as of the firm’s interim statement.

That will most likely result in it paying out only its base dividend after the year-end rather than supplement the final dividend with a top-up, as it has been apt to do in recent distributions.

As for the demerged coal company, it will find willing buyers, says Nagle, environmental concerns notwithstanding.

How different the world looks now in the wake of the energy crisis of 2022 catalysed by the war in Ukraine. Analysts think the debut of CoalCo two years from now is well timed. “In our opinion, the 24-month deadline for the demerger maximises the flexibility for Glencore to demerge CoalCo into a robust equity market,” say analysts at UBS.

CoalCo will also find the welcome mat rolled out at the JSE, which hosts only two coal companies, Exxaro and Thungela, which mainly operate in the infrastructure-constrained environment of South Africa.

This article was first published in the Financial Mail.

The post Nagle’s plan for Glencore rests on this calculated gamble appeared first on Miningmx.


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