Glencore Gets a Dirty Holiday Gift from Anglo American

(Bloomberg Opinion) -- July Ndlovu, the boss of Anglo American Plc coal spin-off Thungela Resources Ltd., did his rival Glencore Plc a big favor earlier this year. When Thungela began trading as a separate company in June, Ndlovu told Bloomberg he wanted to increase output of the fossil fuel: “I didn’t take up this role to close these mines.”

Glencore is the last of the really large listed miners committed to retaining a big footprint in thermal coal (the kind burned in power stations). It’s long taken the position that simply spinning off those assets does nothing to help the climate and might actually make the problem worse. Ndlovu, then, was proof that the London-listed mining and commodity trader’s warning wasn’t just hot air to avoid spinning off a coal business that at the current high prices accounts for almost 30% of its earnings before interest taxation, depreciation and amortization.

Glencore’s alternative plan is to cap coal production and manage the decline of those assets to reach net zero emissions by 2050. It will leave some of its coal resources in the ground.

So, when activist shareholder Bluebell Capital Partners Ltd. this week demanded a separation of Glencore’s coal activities to boost the commodities giant’s valuation, new boss Gary Nagle had a killer argument ready.

At an investor event on Thursday, Nagle pushed back against Bluebell’s thesis quite effectively. The message was simple: Glencore won’t exit coal unless its major shareholders decide they want that. And right now, they’re fine with the way things are.

At this year’s annual meeting, 94% of shareholders approved Glencore’s climate plan, which involves cutting emissions (including those that arise when its coal is burned) 15% by 2026 compared to 2019 levels; the goal is a 50% reduction by 2035 and to reach net zero by 2050. Management said none of its large investors were demanding a coal-spin off.

Bluebell’s frustrations are understandable: Glencore is valued at a miserable seven times estimated earnings. And I’ll admit I, too, thought Glencore should just dump coal. In an ideal world I’d rather it shut those mines down tomorrow. Every lump that gets burned makes the climate crisis worse.

Glencore is transparent about its carbon pollution and it’s pretty ugly: scope 3 greenhouse gas emissions (the ones mostly related to customers burning its fossil fuels) were 343 million tons of carbon equivalent in 2019, which is nearly 1% of the global total. Its coal production will actually increase next year after Glencore decided in June to buy out its partners, Anglo and BHP Group, in a Colombian coal mine, a deal that will quickly pay for itself thanks to soaring coal prices.

Though Glencore says it knows of only one large investor, Norges Bank, that won’t invest for climate reasons, mining coal makes its other ESG arguments ring rather hollow. And given the corruption investigations it’s facing in several jurisdictions, Glencore could do without another reason for shareholders to shun the company.  

The rest of its mining assets, copper, zinc, nickel and cobalt, are vital for things like electric-car batteries and power-transmission lines. From a climate perspective it’s fortunate Glencore doesn’t mine iron ore used in steelmaking, which is harder to decarbonize. Why not just focus on those?

But Nagle makes a good case for why that’s not a responsible approach. A spin-off “decarbonizes our company but doesn’t decarbonize the world,” he says. China and India still consume heaps of the stuff and can’t just switch to 100% renewables and nuclear overnight. Coal prices soared this year when supply became tight and solar, wind and natural gas couldn’t fill the gap.

The profits from Glencore’s coal mines can be reinvested in metals for the energy transition. Royal Dutch Shell Plc made a similar argument recently in rejecting activist Dan Loeb’s call to separate its liquified natural gas and renewables activities from oil exploration and refining.

At the current high commodity price, the Swiss giant is generating heaps of money — it projects almost $11 billion of annual free cash flow. And because net debt is on track to fall well below its target of $10 billion (less than 0.5 times estimated ebitda) and capital expenditures are to remain fairly restrained, there’s significant scope to return money to shareholders, either via share buybacks or dividends.

It’s then for shareholders to decide whether they want to reinvest in a 100% green company or one that still sells a lot of dirty coal. The climate crisis is no less urgent but a once-binary investment decision has become more nuanced lately. Is that a good thing? Honestly, I don’t know anymore.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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