If the ESG movement had one target, it was coal, the grubbiest of the fossil fuels. Mining companies in the Western world eventually succumbed to ESG pressure when they realized that sending their coal operations packing would not only clean up their acts but create value, as investors would reward them for having done good for the planet.
So out went the coal, and the share multiples of the companies behind the spinoffs or sales of the fuel climbed. But coal not only refused to die a polite death, it became hugely profitable after Russia invaded Ukraine a year ago, triggering an energy crisis that sent many countries, from Germany to Pakistan, scrambling for the product they once vowed to downgrade to fringe status.
This phenomenon, in turn, inevitably triggered creative financial engineering designed to both get rid of coal and, in effect, keep it at the same time. No company refined this sleight of hand better than Teck Resources Ltd. TECK-B-T, a producer of copper, zinc and metallurgical coal with a market value of $27.3-billion, making it Canada’s premier mining company.
Last week, Teck unveiled a have-your-cake-and-eat-it-too deal that makes a mockery of the environmental, social and corporate governance strategy that had been pushing the resource industry to get rid of its dirtiest products.
But first, some background.
Teck spent years trying to convince the ESG crowd, and the market in general, that metallurgical coal should not be considered as environmentally toxic as thermal coal. The former is used to make steel, some of which goes into products such as electric vehicles and wind turbines, required for the sustainable-energy revolution; the latter is burned to make electricity (coal-fired plants are responsible for about 30 per cent of global carbon-dioxide emissions).
The effort failed. As far as investors were concerned, coal was coal and burning it was part of the problem, not the solution. Faced with this reality, Teck loaded up with financial advisers, including Goldman Sachs, which knows a thing or two about gaming the financial system, and opted for a deal that looked like a spinoff – and was in the legal sense – but did not act like a spinoff.
Teck will create a new company, Elk Valley Resources, that will hold its metallurgical coal operations. To do so, Teck shareholders will receive one new share in Elk, plus some cash, for every 10 Teck shares they already own.
But there’s a catch – one that works in Teck’s favour. Elk will pay 90 per cent of its cash flow to Teck for an estimated 11 years, via royalty payments and preferred shares. These payments have been called a “transition capital structure.” Translation: Elk will be a spinoff that looks like a Teck subsidiary.
There is a more accurate translation: greenwashing.
Investors appear to have figured out the financial feint pretty quickly. Teck shares rose in the days before the spinoff was announced on Feb. 21, reaching almost $62. Since then, they have retreated fast, closing Friday at just under $53. Teck and its new chief executive, Jonathan Price, will have some explaining to do at the BMO Global Metals and Mining Conference, which began Sunday in Florida, all the more so since BMO Capital Markets was one of the spinoff advisers.
If Teck gets away with this blatant example of greenwashing while leaving the spun-off company starved of cash – the deal goes to a shareholder vote in April – other resource companies are bound to follow. Already the spinoff trend is turning into a net negative for the planet because the ejected coal assets generally do not get wound down – just the opposite, in fact.
Take Anglo-American. Last June, Anglo spun off its substantial South African thermal coal division into a separate public company called Thungela Resources. Unlike Teck’s, it was a true spinoff in the sense that Thungela was not on the hook for payments to Anglo. Full marks to Anglo for a clean break from thermal coal, but the planet received no benefit. Thungela is actually boosting coal production and, earlier this month, announced the purchase of Australia’s Ensham coal mine for US$240-million. Ensham will boost Thungela’s production by 3.2 million tons a year.
Ditto Australia’s South32, itself a spinoff of BHP, the world’s biggest mining company. Last year, South32 sold its South African thermal coal business to Seriti Resources of Johannesburg. Seriti is busy expanding its coal production and is lunging into the export market.
The ESG movement was in part designed to make the world cleaner through sustainable energy production. It is failing on that front. Coal is alive and well despite the spinoffs and sales. Production last year reached record levels and will likely set another record this year. Teck simply found a way to keep benefiting from coal’s rude good health.