November 15, 2023 - Glencore Plc made its name — and minted a generation of billionaires — in large part by mining and trading coal. Its former chief and biggest shareholder Ivan Glasenberg once said the world was “horny as hell” for the fuel.
Now it’s getting ready to get out.
The commodity giant has come under growing pressure to stop producing the dirtiest fuel, even as profits from its mines hit eye-watering levels over the past two years. On Tuesday, the company laid out its solution: buying a suite of steelmaking coal mines from Canada’s Teck Resources Ltd., to create an even bigger coal company that Glencore will eventually hand over to its own shareholders.
The exit by one of coal’s biggest champions marks a watershed moment for both the company and the wider mining industry. After the split — which could take almost three years to complete — what’s left will be one of the world’s biggest miners and traders of copper, nickel and cobalt, all essential commodities for the energy transition.
The move reflects a conundrum facing the mining industry. For producers who still have exposure to coal, investor pressure, especially in Europe, is growing. And yet persistently strong demand — particularly as Russia’s invasion of Ukraine continues to disrupt energy markets — means the business remains a huge profit driver.
Glencore’s solution is to list the new combined coal business, which will be the world’s biggest shipper of the fuel, in New York, with secondary listings in Toronto and Johannesburg. The “green” metals company will continue to trade in London.
For Glencore shareholders who will receive stock in the spinoff — chief among them Glasenberg himself who still owns nearly 10% — it’s a big bet on the future appeal of coal in Western capital markets.
“There seems to be a very, very strong appetite in the market and particularly the US for a business of this size, of this scale, of this cash generation,” said Chief Executive Officer Gary Nagle, who succeeded Glasenberg at the helm two years ago. “We believe we would get better valuation.”
Glencore has long been synonymous with coal. Glasenberg, who built Glencore in its current form over his two-decade tenure, made his bones in the company trading the dirtiest fuel and spearheaded its 2013 takeover of Xstrata in a $90 billion deal that made it the world’s biggest coal shipper. Nagle, like his predecessor, also started his career in the coal business.
Glencore’s bet on coal has paid off handsomely. While it has traditionally vied with copper as the biggest earnings driver, last year soaring coal prices meant it made a record $17.9 billion, dwarfing profits at all its other divisions.
And as rival companies exited the business, Glencore stayed the course. Glasenberg, and then Nagle, insisted the world — and particularly developing countries — still needed Glencore’s coal, and that it was more responsible to run the mines itself than sell them.
The first sign that it might be thinking about an exit came earlier this year, when Teck said it had rejected a $23 billion takeover offer from Glencore, in which the Swiss company proposed combining the two businesses and then splitting them into specialized metals and coal companies.
However, coal was not the initial prize — Nagle was more interested in Teck’s copper business, and particularly the huge Quebrada Blanca project that borders its own Collahuasi mine in Chile. Copper has become a growing focus for the world’s biggest miners, with demand expected to surge as the world electrifies, while new supply is constrained.
Sour on Coal
Teck and its controlling shareholder — Canada’s Keevil family — came out strongly against Glencore’s offer. And as the takeover saga rumbled on, Glencore’s investors continued to sour on coal.
In late May, Glencore’s climate plan lost more support, with only about 70% of investors backing it at the company’s annual meeting. Almost 30% of shareholders also backed a resolution urging the company to explain how its thermal coal business aligns with efforts to limit the increase in global temperatures to 1.5C, forcing the company to engage with investors on both resolutions.
According to Nagle, shareholders were also receptive to the idea of putting Glencore’s thermal coal mines together with Teck’s longer life steelmaking coal assets in western Canada, to create a more valuable company.
“Adding the coking coal to the thermal coal makes it a much more attractive business,” said George Cheveley, a portfolio manager at Ninety One UK Ltd. “Coking coal, under any scenario, will be required for a lot longer than thermal coal. It offers a longevity that thermal just doesn’t have. It would have been harder to spin without coking coal.”
Eventually, with Teck and family patriarch Norman Keevil standing firm, Glencore switched to a bid for the coal business alone. Teck had been forced back to the drawing board on its strategy for the unit, after an earlier, more complicated spinoff plan failed to get enough shareholder support.
On Tuesday, Glencore announced it agreed to pay $6.93 billion for a 77% stake in Teck’s coal business, while steelmakers Nippon Steel Corp. and Posco, which currently own minority stakes in Teck coal mines, will own the rest.
Once the deal and spinoff are complete, both Glencore and Teck will be very different companies. While both will be smaller, their focus on metals such as copper and zinc is likely to make them more appealing to both investors and rival companies.
Glencore has one of the world’s biggest copper businesses and crucially is the dominant non-Chinese miner of crucial battery-making ingredient cobalt.
Its sprawling metals business has previously been on the radar of BHP Group — the world’s biggest miner — and could feasibly become a target once the coal business is gone.
It’s a similar story for Teck. And while the company has agreed a standstill with Glencore for two years after the close of the deal, the restriction would lapse if another miner decided to take a run at the Canadian company.
Nagle, who insists walking away with only Teck’s coal mines is not a second prize, now has just over two years to sell his giant new coal business to investors and create an appetite that will deliver the increased value he expects.
“This is not an exact science, you can get 10 experts in the room and get different opinions,” the CEO said, on the potential valuation of the new company once it is listed. “I think the general view is that there would be some material value creation and that’s why we’ve gone down this road.”