Glencore abandons plan to exit coal after investors say no

Glencore has abandoned plans to spin off its coal unit just nine months after saying it would exit the profitable but polluting business, following discussions with its shareholders who pushed back against the move.

Glencore’s announcement last year that it would split itself in two by hiving off coal marked a major strategic pivot for the company, as well as a watershed moment for the wider mining industry as the biggest shipper of coal — and one of its biggest champions — prepared to follow its rivals in exiting.

The investor-led U-turn highlights the conundrum facing fossil fuel companies and the shareholders that own them. From coal to oil, producers have come under pressure to cut their emissions — but that would mean missing out on the bumper profits they’re still pumping out.

For many investors, Glencore offers a unique proposition: a miner that produces metals like copper that are needed to decarbonise the global economy, while also generating huge coal profits. The company has spent the last month consulting shareholders, and the majority of those that expressed a clear opinion were in favour of keeping the coal unit to help fund growth in metals and support shareholder returns, Glencore said.

Glencore’s coal business is one of its most profitable units, driving record returns in recent years. It has benefited significantly from the energy crisis in the wake of Russia’s invasion of Ukraine, as well as a dearth of new production as rivals and banks turn their back on the sector. And while the west is seeking to wean itself off the dirtiest fuel, global demand for coal is at record levels.

The announcement in November that Glencore planned to spin off its coal business promised to represent a defining moment in the tenure of chief executive Gary Nagle, who took the helm three years ago from long-time CEO and top shareholder Ivan Glasenberg.

The remaining company would have been one of the biggest miners and traders of copper, nickel and cobalt — all essential commodities for the energy transition — but without the financial cushion provided by coal.

Late Wednesday, Mr Nagle indicated shareholders have made the right decision, telling reporters that “common sense has prevailed”.

Asked about what had changed to explain the pivot, the CEO said the “ESG pendulum had swung back” in the past year, and that investors recognised that Glencore was the best owner of the coal business.

Glencore announced the decision on coal alongside its first-half financial results, which included core earnings of $US6.34 billion ($9.7b), down 33 per cent from a year earlier. Its sprawling commodity trading business also reported a sharp drop in earnings as the volatility that its traders thrive on began to fade, with profit of $US1.5b in the first half.

Built on coal

Coal has always formed a central part of Glencore’s business and an exit seemed an unlikely proposition for a company that was built on the dirtiest fuel.

Mr Glasenberg, who led the company for two decades, was a former coal trader who would often point to the insatiable demand from Asia even as the west moved to step back from coal. His last deal while preparing to step down in 2021 was the purchase of a thermal coal mine in Colombia. Mr Nagle, his hand-picked successor and a fellow South African, also started his career in the coal business and has also long defended the fuel.

Glencore has said repeatedly that it would exit if there was pressure to do so from investors, but for years the company kept digging up coal while most of its biggest rivals sold out. Glencore’s plan was instead to run its existing operations until they were depleted.

That appeared to change when Glencore tried to buy Teck Resources a year ago, with a proposal to split the combined company into two separate coal and metals producers.

Glencore failed to win Teck, but it did walk away with its coal mines as a consolation prize. It announced at the same time that it planned to separate out the coal business anyway within two years after the deal closed. The decision was based on positive feedback from investors to its original plan for Teck, the company said on Wednesday.

Yet over the months that followed, it became increasingly clear that investors were not ready to say goodbye. Bloomberg reported in April that several of the company’s top holders favoured keeping the coal business.

After Mr Glasenberg, who owns 9.9 per cent, Glencore’s biggest shareholders are Qatar’s sovereign wealth fund, Capital Group and BlackRock. If Glencore had gone ahead with its spinoff, many investors including BlackRock would have seen their exposure to the profitable coal business cut off because of policies that prevent them from owning pure-play coal companies.

Buying Teck’s mines saw Glencore take control of a large suite of coking coal mines — used to make steel — that’s now added to its own business that was predominantly based around thermal coal that is burned to generate power.

The discussion over the future of Glencore’s coal mines highlights a wider debate about whether investors and mining companies should reduce their exposure to the business, which creates the risk that they are replaced by operators and shareholders who are less concerned about cutting global emissions.

The mining world has also changed since Glencore announced it was planning to spin off its biggest earner. BHP, the largest miner, failed in an attempt to buy rival Anglo American in a $US49b deal earlier this year, and dealmakers at rivals are also eyeing potential mergers and acquisitions as a new era of dealmaking takes hold across the industry.

For Glencore, slimming down and losing much of its firepower would have limited its options to compete with its biggest peers in any potential M&A.

“Scale is important in this industry,” said Mr Nagle.

Bloomberg