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More investors push Glencore to keep coal post Teck deal

Glencore's head office

Photo by Bloomberg

22nd March 2024

By: Reuters

  

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A growing group of Glencore investors are keen for it to keep mining coal instead of spinning out the soon-to-be enlarged unit, with one eye on its financial outlook and another on the environmental benefits of keeping the fuel in-house.

Echoing a demand last week by activist Tribeca Investment Partners, investors said the polluting fossil fuel would be a lucrative option - for a decade or two at least - even as it is phased out in favour of renewable energy.

The Swiss-based miner and trader is set to see its coal unit grow sharply after it completes a $6.9-billion deal to buy the majority of Canadian miner Teck's one, but said it plans to list the combined assets separately in New York.

Glencore is already a top producer of thermal coal with output of around 110-million tonnes a year, and also has coking coal assets.

By buying Teck's business, in a deal set to close by the third quarter this year, it will add 20-million tons of annual steelmaking coal capacity and create a powerhouse that analysts say should generate $5-billion to $6-billion a year in free cash flow.

A greater focus on climate risk in recent years has seen a number of pension and investment funds, financiers and insurers cut support for coal companies, leading some including Rio Tinto and Anglo American to sell or spin theirs out.

While doing so can lead to a share price bump, critics say the assets are often shifted into the private markets and run for longer with no investor oversight, potentially leading to a worse climate outcome.

For a long time, Glencore had adopted the same line, and said ditching coal would do little to cut its emissions, only to change its mind after the Teck deal was agreed, with Chief Executive Gary Nagle saying it would consult shareholders for their views on spinning off once the acquisition is concluded.

Ahead of any vote on the plan, though, three top-15 investors spoken to by Reuters said they would oppose the attempt to spin off its coal assets.

One top-10 shareholder said they 'strongly disagree' with the idea and had already told the company. The shareholder declined to be named as they are not authorised to speak publicly.

Andrew Mason, head of active ownership at Abrdn, which holds shares in Glencore, said: "In most circumstances, we do not believe that simply divesting as quickly as possible will achieve the best outcome."

"Companies need to have credible strategies that support real-world decarbonisation," he said, adding that a timed phase-out would facilitate a "just transition" to a greener future that minimised the impact on workers and communities.

A responsible wind down of coal is better than a divestment, given the "rapidly diminishing" global carbon budget, the emissions allowed before the world breaches its goal of capping global warming at 1.5 degrees Celsius, said Naomi Hogan at nonprofit climate group Australasian Centre for Corporate Responsibility (ACCR).

"Fundamentally, good corporate governance requires Glencore to take responsibility for the emissions from its coal portfolio," Hogan added.

Glencore's carbon emissions rose 8.8% in 2023 from the previous year partly due to higher coal production, but were still down 21.8% from a 2019 baseline, according to its annual report.

"This is an extremely concerning step backwards for Glencore," Hogan said in a note.

According to the Climate Action 100+ investor group, Glencore's efforts to-date are mixed, as it failed to meet or partially meet their climate expectations on issues including capital expenditure and decarbonisation strategy.

Data from LSEG, however, places it among the best-performing of its peer group on a range of environmental, social and governance-related metrics, ranking it fourth out of 455 companies.

As well as the environmental argument, Tribeca said the coal assets would continue to be profitable as long as they were active and could benefit the rest of the portfolio - something the top-10 investor echoed, citing a likely surge in demand for cheap electricity from data centres in the years ahead.

Ian Woodley, portfolio manager at Old Mutual, agreed: "The likelihood is in 10 to 12 years, we'll have another big upcycle, maybe once, maybe twice. And you see just how much cash the assets generate."

After hitting an all time high above $400 a ton in 2022 when countries sought alternatives to Russian gas after the start of the war in Ukraine, thermal coal prices now trade around $130, while coking coal rose to above $300 a ton last year.

"In a private company, that would be paid out as dividends, but Glencore can take that cash and invest it in the rest of their portfolio," Woodley added.

Edited by Reuters

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