For the resources industry, the trick to meeting ESG standards was pretty simple: sell your dirty fuels, especially coal. If you did, investors who cared about the health of the planet would love you, and your company’s valuation would go up.
The formula seemed solid a few years ago, and a big number of mining giants sold or spun off their coal assets. Canada’s Teck Resources (TECK-B-T) was the latest to pursue the black-to-green transition with the sale, announced last year but not yet approved by Ottawa, of its metallurgical coal business to Switzerland’s Glencore (GLNCY).
Today, the formula is already looking like a relic of the now-ailing environmental, social and governance movement. Exhibit A is the Glencore report, released this week by Australia’s Tribeca Investment Partners. The report, in the form of a 16-page letter to Glencore’s board of directors, makes recommendations on how the company could inject some life into its underperforming shares.
Chief among them is Tribeca’s call for Glencore to keep its massive coal business after it buys Teck’s coal. The recommendation presents a remarkable reversal for Tribeca – and for the ESG movement in general. Only a few years ago, coal was viewed as the ugliest, grubbiest fossil fuel – the chief propellant of global warming – and ESG investors wanted nothing to do with it. Tribeca, in fact, urged Teck to get rid of its coal via a sale or spinoff.
Today, the thinking is reversing, as Tribeca’s latest call shows. How did that happen so fast? First, some background.
Around the turn of the decade, ESG investors were piling pressure on Big Mining to ditch coal. At the time, Mark Cutifani, then CEO of Anglo American, one of the world’s biggest diversified mining companies, told The Globe and Mail: “We are about to see a game-changing scenario. At some point soon, there will be a restructuring of businesses and assets, starting with thermal coal.”
Many did. Anglo, for instance, spun off its South African thermal coal (the fuel burned to make electricity) into Thungela Resources. Brazil’s Vale, owner of the Inco nickel operations in Canada, sold the last of its coal assets in 2022 as part of its drive to “decarbonize its portfolio.”
Teck vowed to do the same, even though its coal division, Elk Valley Resources, produced steelmaking coal. As such, it was considered to be more ESG-friendly, since the energy transition would be impossible without steel for electric vehicles, wind turbines, solar panels and other low- or zero-emission products.
When Glencore agreed to buy Elk Valley last year in a deal valued at US$9-billion, the idea was to combine its own thermal coal with Teck’s metallurgical coal and spin out the entire business. In February, Glencore CEO Gary Nagle confirmed the spinoff intentions so the company could focus on energy-transition metals such as nickel and copper, “but it’s always subject to what our shareholders want.”
Here is betting that Glencore shareholders, whose roster includes former CEO Ivan Glasenberg, the Qatar Investment Authority and some of the biggest U.S. and British institutional investors, will turn down Mr. Nagle’s plan. Coal is losing its pariah status.
Investors have come to realize that pushing coal out the door would do nothing to prevent the planet from turning into an orbiting baked potato. Unloading coal did not mean coal would not be burnt; less scrupulous owners of the fuel, perhaps those with weak or no net-zero ambitions, might burn increasing amounts of it, accelerating global warming.
Here’s the new thinking: Let the biggies with serious net-zero commitments, and whose progress on that front can be monitored because they are publicly traded companies, keep their coal and run down those operations over time (Glencore’s net-zero goal is set for 2050, by which time thermal coal mines should be essentially depleted).
The other aspect of the new thinking is that it would be a shame for the biggies to eject coal from their portfolios given the gorgeous torrents of cash flow they produce, much of which, theoretically, could be used to finance the transition to clean, or at least cleaner, energy. In 2022, coal accounted for 50 per cent of Teck’s revenue and 75 per cent of its profit and helped finance the cost overruns at its QB2 copper mine in Chile.
Finally, there is the “re-rating” argument. Mining companies that shed their coal assets to concentrate on “clean” energy-transition metals were supposed to trade at higher multiples. For the most part, that has not happened, though the better valuations could still come – or not. So why not keep coal?
All of which brings us back to Teck. Given the change in attitude on coal and the product’s hefty cash flows, it’s a mystery why the company was so eager to sell it. And if, as Tribeca says, Glencore’s purchase of Teck’s coal will transform Glencore into “a leading global producer of both seaborne steelmaking and energy coal, with some of the lowest cost and highest margin operations in both commodities,” why wasn’t such a strategic and profitable asset not kept in Canadian hands? A comparably priced bid led by wealthy Canadian investors Pierre Lassonde and Prem Watsa failed to make the cut.
Teck may come to regret selling its coal, and the company’s investors may regret the decision too. The winner is Glencore, but only if it does not ditch its coal assets. Mr. Nagle may have no choice in the matter. The new ESG thinking suggests that shareholders will reject his coal spinoff plans. He could win by losing.
Eric Reguly