2023-11-14 21:56:31
The Glencore deal
of Glencore to buy Teck Resources’ steelmaking coal unit
shows that cheap fossil fuels can be a lucrative option for businesses – for a decade or two at least – even if they are phased out in favor of renewable energy.
Western companies may be reluctant to pursue new sources of coal or build new mines, but investors believe coal still has an important role to play in the coming years as it can be used to meet the needs of the global transition to cleaner energy. Demand for coal, driven by Asia, remains strong, pushing up prices.
Coking coal is emerging as a prime option for businesses because it is used to make steel, an important component in large infrastructure and renewable energy projects.
The world’s largest miner BHP, for example, also decided this year to hold on to its higher-quality coking coal assets, following a 2020 review of its broader coal portfolio resulted in the sale of some mines .
By purchasing Teck’s coking coal business, Glencore will create a coal powerhouse that analysts expect to generate between $5 billion and $6 billion a year in free cash flow. The company is already one of the largest publicly traded producers of thermal coal, with production of around 110 million tonnes per year, and also has its own coking coal assets.
Among the dirtiest fossil fuels, thermal coal is used to generate electricity and is being phased out as part of a global transition to clean energy sources.
Glencore CEO Gary Nagle reiterated the company’s commitment to phasing out its thermal coal assets, but said he believed demand for thermal coal and coking coal would remain strong in the years to come. come.
Mining investors agree.
“The global economy benefits from cheap energy. However you get that energy: coal, natural gas…that cheap carbon energy helps build economically viable renewables, otherwise renewables start to seem expensive,” said Ian Woodley, portfolio manager at Old Mutual.
“With a reasonable lifespan, up to 30 years, (these companies) say that they are not going to embark on a major exploration campaign or build new mines, but that they will invest for safe production and productive, and then harvesting those assets in cash with everything going to shareholders, it’s going to be a great return of capital story,” he added.
COKING COAL PRICES ARE SOAR
With Western banks and insurers pledging to restrict lending and insurance coverage to the sector due to climate change concerns, coal mining expansion is unlikely.
Yet global coal demand has reached a record 8.3 billion tonnes in 2022, half of which comes from China, according to the International Energy Agency (IEA).
Coking coal prices have risen this year to above $300 a tonne due to tight supply and optimism that the global economy can avoid a deep recession.
Thermal coal prices are hovering around $120 a tonne, following hitting a record high of more than $400 last year as countries desperately sought alternatives to Russian gas following the start of the war in Ukraine.
“Asia is not going to stop burning coal anytime soon,” an investor in a natural resources fund said, adding that the company will find a way to make money from the assets even following they are sold. .
Glencore said it would divest the combined coking coal and thermal coal assets within two years of closing the deal and list those assets in New York, with secondary listings in Toronto and Johannesburg .
“Coking coal is unique and is not going away…Teck has been one of our most profitable investments,” said Peter Letko, co-founder of investment firm Letko Brosseau, calling Teck’s steel business of “valuable asset”.
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