Glencore is cleaning up in coal.
Bumper results for last year will owe a hefty chunk of earnings to the ultra-polluting commodity. That risks clouding a debate, given fresh air on Monday by activist Bluebell Capital Partners, about how best to run down coal-producing assets.
Glencore touts itself as the miner supplying the commodities the world needs to decarbonise. It has the copper required for increasing electrification as consumers shift away from fossil fuels; the nickel and the cobalt for batteries to power electric cars.
But it is also one of the world’s largest producers of thermal coal, a product used to generate electricity, the price of which has rocketed over the past year. Investors don’t want to own coal, bankers don’t want to fund it, but faced with soaring natural gas prices, governments still want to burn it.
Other big miners have concluded coal is not worth the ESG strife from investors and sold out. Glencore’s resistance shows a consensus is yet to emerge. It insists that it is the best owner of its coal mines; that running them down over the next 30-ish years is the “responsible strategy for both our business and for the world”. Bluebell last year called that “morally unacceptable and financially flawed” in a missive to the board. Its follow-up letter argues the debate should be about how Glencore spins off coal, not whether it should.
The argument is not an all-or-nothing fight about divestment. Big investors now back strategies premised on the idea of responsible run-off. And while concern might have previously centred on sales of assets to private, unaccountable owners, recent experience on the public markets has added fuel to the fire of divestment sceptics.
Days after miner Anglo American spun off its South African coal assets in the form of Johannesburg-listed Thungela, Thungela’s boss told Bloomberg bluntly: “I didn’t take up this role to close these mines”. Far from proving uninvestable, Thungela’s share price has more than tripled as thermal coal prices have risen. Glencore argues that as a diversified commodities group, it can be trusted not to invest to extend the life of coal assets — even if it has expanded its ownership of Colombian coal mine Cerrejón.
Bluebell’s latest proposal takes Glencore’s claim that it is best-placed to run down the assets at face value. But it then challenges the company to commit to doing so even if it doesn’t receive the full benefit of the assets.
The hedge fund suggests Glencore could keep control of the spun-off thermal coal business via 100 per cent of the voting rights, and retain full marketing rights. But it would cede 91 per cent of the economic interest in the demerged company. This would clean up the investment case for Glencore. Meanwhile Glencore’s continued involvement would remove some of the tarnish of investing in a pure-play coal company.
Maybe Bluebell’s plan is unnecessarily complex. Dual share structures are unpopular with London investors, who are very attached to the “one share one vote” principle. It is hard to know what valuation bump Glencore might get and whether the pure-play coal company might trade at a larger discount because of the convoluted governance structure. But solutions to the problem of phasing out coal are unlikely to be simple.
Glencore’s strategy calls on investors to trust it to do the right thing for the environment. That is no small ask from a company that has had its run-ins with regulators over the years.
Investors may instead trust in Glencore’s ability to do the right thing for its bottom line. For now, running down coal is not inconsistent with that. At some point though, the “responsible strategy” for Glencore’s business and the world may well diverge — and at that point, investors will need to grapple with far more complex proposals for cleaning up coal than Bluebell’s.
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