Coal is cash, but not even activists wanted Glencore to exit its dirty business

Glencore’s decision to scrap its plan to spin off its coal businesses highlights the complexity of the relationship between carbon-intensive companies, their pro- and anti-fossil-fuel investors and environmental activists.

In what might appear counterintuitive, Glencore’s conventional coal-loving shareholders, the more environmentally-sensitive investors on its register and external activists all wanted the company to hold on to its coal unit.

Glencore has shelved plans to spin off its coal unit, allowing it to keep reaping profits from the dirtiest fossil fuel.Credit: Phil Hearne

Glencore originally announced plans to move its enlarged coal unit last year into a new, separately listed company after its $US6.9 billion ($10.6 billion at the time) acquisition of a 77 per cent stake in Teck Resource’s Elk Valley Resources metallurgical coal assets. (Japan’s Nippon Steel and South Korea’s Posco held the remaining interests).

On paper, the scheme made sense. Glencore would be rid of its dirty coal businesses and the ESG (environmental, social and governance) discount attached to them; it would gain better access to bank funding (many banks won’t lend to carbon-intensive businesses) and gain a sharemarket ratings uplift because of its cleaner focus on future-facing commodities.

The coal unit, listed in a US environment far friendlier to carbon-emitting businesses than the UK or Europe, would also get a valuation uplift as a pure-play cash cow.

For Glencore investors, however, the cash from coal has always been a major attraction.

Glencore is the world’s largest seaborne thermal coal producer and trader, with coal historically producing between about a third and a half of its earnings. It’s not surprising that existing shareholders – who self-evidently aren’t deterred by Glencore’s coal assets – want to retain them.

Shedding coal would significantly reduce Glencore’s cash flows and earnings and its size relative to resources giants like BHP and Rio Tinto. It would also reduce its capacity to develop and expand its portfolio of copper, zinc, nickel and cobalt, or to participate in any large mergers and acquisitions.

When the focus on ESG investing was at its peak a few years ago, Glencore – under pressure from sustainability-sensitive investors – promised initially to cap its coal production and allow its existing portfolio to deplete over time. More recently, it has dropped the cap but set out a schedule of reducing emissions in stages, with a 50 per cent reduction by 2035 and an “ambition” of achieving net zero by the end of 2050.

Shedding the coal assets might have meant the remaining Glencore would shed its most emission-intensive assets – but, of course, they wouldn’t simply disappear.

There was no significant constituency that supported the proposed spin-off.

Instead, they would be held within a new pure-play entity that would have every incentive to expand its production, in a US environment that is far more supportive of fossil fuel producers, particularly if Donald Trump regains the presidency.

Emissions from what would have been Glencore’s former coal assets would likely be increased, not reduced, which is why even environmental and social activists would prefer them to stay where they are.

In other words, there was no significant constituency that supported the proposed spin-off.

Indeed, when Glencore canvassed its shareholders – it consulted shareholders holding about two-thirds of its voting shares (presumably including former CEO Ivan Glasenberg, the biggest shareholder with a 9.9 per cent stake) – more than 95 per cent of them wanted the company to retain its coal assets.

Glencore said shareholders were sceptical about the scale of any valuation uplift for its residual business after a spin-off and didn’t see the separation of coal as ESG-positive, given the group’s existing plan to reduce its emissions.

Chief executive Gary Nagle said that shareholders still recognised that “cash is king”, and that the coal operations did generate “huge amounts of cash”.

He also noted that the “ESG pendulum” had swung back over the past year, citing the response of some US states to the “ESG narrative”.

In the US, there has been a backlash against ESG investing – seen as “woke” – with some Republican-governed states banning asset managers that have ESG policies from any state-owned or directed investment activity.

There’s also been a dawning recognition that the energy transition isn’t occurring as rapidly or smoothly as some envisaged, and that fossil fuels will be required for longer than originally thought. There is a far greater focus on energy security, particularly after Russia’s invasion of Ukraine disrupted Europe’s energy supplies.

Major oil companies like Shell and BP have backtracked on plans for early exits from fossil fuel production, increased their investments in oil and gas, and shifted their timelines for reducing carbon emissions in recognition of both their investors’ desire for higher returns and the world’s need for oil and gas – and coal – until there is a larger and more stable clean energy base in place.

While that perspective doesn’t sit well with environmental activists, they are pragmatic enough to recognise that they have more insight and more leverage when emissions-intensive assets are held within large publicly-listed companies with diversified portfolios than when they are within pure-plays or in private hands, where there is an obvious incentive to expand production and earnings.

Rio Tinto, BHP and Anglo American have all shed their energy coal mines (Anglo now plans to also sell its metallurgical coal mines), and BHP demerged its petroleum business in a deal with Woodside.

While there hasn’t been any obvious uplift in valuation from their reduced carbon footprints, ESG investors and external activists have lost leverage over them and, as a result, of the coal produced from those mines (some of which Glencore acquired).

With the announcement that the demerger has been abandoned, Glencore also announced its first-half results, which were down by a third to (on its preferred earnings before interest, tax, depreciation and amortisation basis) $US6.3 billion ($9.7 billion).

A 36 per cent slump in realised energy coal prices and a 6 per cent fall in metallurgical coal prices cut the contribution of coal to the result from $US8.85 billion to $US2.7 billion.

After record demand for coal last year, global economic growth has been tepid and China’s economy has been spluttering, with all the major resource groups experiencing weaker prices.

Even so, Glencore’s metallurgical, or steel-making, coal operations generated EBITDA margins of $US115 a tonne and its energy coal operations had margins of $US31 a tonne (more than 60 per cent lower than those of a year earlier).

Even at lower coal prices, these are portfolios of highly profitable, cash-generating assets – assets that Glencore and its shareholders will now retain and, perhaps, manage down over time.

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