Less is more, but not for Glencore
For mining giant Glencore, ‘no’ wasn’t an option in its pursuit of Teck’s coal operations. But City PM’s energy editor Rhodri Morgan considers how this acquisition will look in a world seeking a greener future.
Due to and in spite of eye-watering profits over the last few years, trading and mining giant Glencore is perhaps the most anathematised face for the need to transition to green energy. The filthy king of commodity capitalism.
For its own part, Glencore, which enjoyed coal-powered revenues of $255.98bn in FY22, has recognised the contradiction in its operations. Coal demand continues to go great guns while net zero ambitions must be, or be seen to be, progressed.
But blockbuster activity, Glencore’s trademark in recent years, was on full display once again last week as the company’s long-running pursuit of Canadian miner, Teck Resources, finally came through. The deal saw Glencore receive 77% of Teck’s coking coal operations for $6.9bn cash, with Nippon Steel Corp. and Posco Holdings purchasing the remaining 33%.
So how does the company’s strategy of a “managed decline” in coal assets for a greener future live within this reality?
How the deal was done
The business case for both sides is clear; Glencore takes the majority of a world-leading miner while Teck clears debt and strategically re-invests. Teck didn’t see it as a win-win back in 2020 when talks first began and subsequently quickly broke down.
Discussions then resumed in 2022, culminating in a $23bn offer from Glencore, a then-20% market premium, which was duly dismissed as a “non-starter” by Teck top boss, Jonathan Price. Price was instead determined to split Teck into two separate businesses focusing on coal and base metals.
This didn’t appear to sit well with Glencore. The ink hadn’t dried on a deal to acquire 100% of a giant thermal coal mine in Colombia and in 2022, the global coal business was firing, accounting for more than half of Glencore’s FY22 profits. Like many major commodity operators hitting a post-coronavirus pandemic zenith, ‘no’ wasn’t an answer Glencore was willing to accept.
So if it couldn’t get the farmer to part with the pig, Glencore would try to buy the farm. But Teck’s primary concern was opening up its shareholders to thermal coal and oil trading through the creation of two separate businesses post-sale, outlined in Glencore’s proposal.
Glencore neatly solved this problem by re-bidding for Teck’s coal business in June, culminating in the deal sealed last week.Turns out the pig was for sale eventually.
The buy-spin cycle
Bruising though it appeared, Glencore’s aggressive pursuit of Teck ticked strategic boxes before the final deal was signed. Teck abandoned initial plans to spin-off its coal business, something Glencore can now achieve in-house. Additionally, steelmaking coal carries a higher price than its thermal counterpart.
All this would have delighted shareholders 20 years ago, but the growing concern is how exactly this activity would contribute to lowering global temperatures.
Once again, Glencore has answers. The plan now is to demerger the combined coal unit into a separate entity and list on the NYSE, allowing London-listed Glencore to focus on its already-giant portfolios across copper, cobalt, lithium and zinc.
There’s a question here for policymakers in London as well. Glencore decided to list in London due to its reputation in the mining industry. However, if it’s now planning to launch its spinoff – a coal spinoff at that – we have to ask, is this a symptom that London is losing its appeal for commodity IPOs?
Once the Teck deal and subsequent spin-off finalise next year, both companies will look very different in size and scope. Importantly, all eyes will remain on Glencore’s ‘green’ strategy. However, for the foreseeable future, it appears that is a problem both it and its investors can afford.