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OPINION

Glencore lands the deal of the century

Glencore lands the deal of the century
January 25, 2023
Glencore lands the deal of the century

A few years ago, coal production was, well, in the pits. Then Covid-19 struck, lockdowns came in, and demand in general went on the slide. Coal mining, it seemed, was a sunset industry.

Rio Tinto (RIO) was first to quit. The intention of Jean-Sébastien Jacques, the then chief executive, was to make the group “leaner and greener” with a focus on iron ore, aluminium, copper and bauxite. It got out of coal in 2018 with the sale of its Kestrel mine in Australia. This opened the door for investors with an aversion to coal to take a fresh look at Rio, but the group’s ethical credentials came unstuck with its grab for a high-grade iron ore deposit in Australia’s remote (but sacred to Aboriginals) Juukan Gorge. After Jacques’ downfall in January 2021, his successor, Jakob Stausholm, came in with a new broom. The report he commissioned on Rio’s internal culture undermined its ethical standing as well. The findings were shocking. The macho culture across its worldwide operations involved systemic bullying, sexual harassment and racism. Mining, it seems, is a dirty business in more ways than one. But Rio can’t be alone. Other companies may wish to take a long hard look at themselves too.

Anglo American (AAL) may have cut its exposure to coal because its long-serving chief executive, Mark Cutifani, wished to leave a cleaner slate for his successor, Duncan Wanblad. He retained the group’s investments in the mining of metallurgical coal, which is needed for the manufacture of steel, but disposed of its thermal coal production. This has helped Anglo reduce its global carbon dioxide emissions; it had also lost $15mn (£12mn) in 2020 on its South African thermal coal operations. They were spun off in June 2021 as Thungela Resources (TGA). This, together with the agreed sale of Anglo’s stake in the Cerrejón coal mine in Colombia (which exports high-quality thermal coal to Europe), helped to secure Cutifani a £2.2mn bonus in 2021.

Glencore (GLEN) only had to find cash of $100mn to buy out Anglo and BHP (BHP), its partners in Cerrejón. This was a curious decision, for Gary Nagle, Glencore’s chief executive wrote in its 2021 annual report that the group was, like its peers, “committed to reducing total emissions... by 15 per cent by 2026 and 50 per cent by 2035... our ambition remains to achieve net zero total emissions by 2050”. It was as though Glencore was saying (in echoes of St Augustine) “Lord, make me pure, but not quite yet”. Deal of the century or not, it’s hardly surprising that large institutions such as Legal & General Investment Management and HSBC have filed an AGM resolution to tease out how increasing coal production fits within Glencore’s environmental policy.

Nagle’s response can be predicted from Glencore’s half-yearly report. He said, in his rather technical way, that he expects “the world’s decarbonisation pathways will be non-linear” and talks of “an overly accelerated decline of fossil fuel base load generating capacity” with a mismatch between “the current and nearer-term capabilities of variable renewable energy sources and associated infrastructure around the world”. Glencore’s “responsible coal decline strategy” backed by further investment in “copper, nickel, cobalt and related recycling”, he says, will meet the “energy needs of today while helping to support an orderly energy transition”.

This approach sits between environmental, social and governance (ESG) investors urging a swifter transition and investors at the other extreme who think that 'woke' ethical issues should take second place to the pursuit of profits. Nagle’s stance could be seen as a pragmatic compromise based on the need for transition to keep pace with the practical reality. The global demand for coal rose to a record high last year, according to the International Energy Agency (IEA). The coal price more than tripled. In June 2021, Thungela traded at 111p a share. Its share price is now 10 times this. In the first half of 2022, Glencore’s coal alone produced $8bn of earnings before interest, tax, depreciation and amortisation, of which a quarter was due to Cerrejón – that’s 20 times the cash Glencore stumped up to buy out Anglo and BHP at the beginning of the year. This windfall was an indirect consequence of the oil and gas shortages due to the cut-off of Russia’s supply. For the time being, coal accounts for more of Glencore’s profits than all of its metals put together.

The resurgence of coal hasn’t helped to reduce the staggering 36bn tonnes of CO2 the world belches into the atmosphere every year. The IEA estimates that in 2021 coal contributed 15.3bn tonnes (compared with 7.5bn tonnes from gas and 10.7bn from oil). Expect worse in 2022. True, mining is only part of the problem, but the outgoing Rio and Anglo chief executives were disingenuous. Forget their environmental claims. Disposing of their companies’ coal assets only passed the problem on to somebody else. Would they have sold if they’d known that Thungela, Glencore and others would find themselves mining black gold?