Glencore/Teck: passing the buck to make a buck

Vacuum cleaners sanitise by collecting debris. In recent years, Glencore has hoovered up coal assets other mining groups wanted to cleanse themselves of. The Swiss group committed to getting out of coal even as it accumulated cheap assets and banked the cash flows. The strategy has made lots of money for investors.

The latest big acquisition — $6.9bn cash for 77 per cent of the coking coal assets of Teck Resources — starts the clock on a demerger in two years. Talk about eating your cake and still having it.

Plenty of shareholders in Glencore and Teck of Canada want out of filthy coal. Profits from the commodity have waned with the energy crisis triggered by the Ukraine war. The price of power-generating thermal coal, Glencore’s strong suit, has fallen nearly two-thirds in the past year. That adds impetus to get out.

But wait, what happened to Glencore’s “managed decline” of coal assets? The business had promised a responsible run-off of its fossil tree digging enterprise.

The narrative has changed of late. Glencore now expects to demerge its entire coal business within two years. It has closed some older mines in Colombia. But pressure to shut more will diminish as the demerger approaches. The new management of the coal spin-off may then be reluctant to whittle it down.

Teck’s coking coal business, Elk Valley, will make the unit a more attractive investment. Elk Valley’s hard coking coals earn a premium price of $293 per tonne. That is about double the price of lower quality coking and thermal coal.

Both Glencore and Teck argue they got the best deal. Nippon Steel and Posco can afford agnosticism on that question. Neither will put up much for their stakes. At a debt-free valuation of $8.9bn for the whole business, the price looks similar to what BHP received in a recent coking coal sale. Analysts had expected Glencore to pay more.

Unusually, Teck sought no future royalties from Elk Valley, Liberum noted. Complete separation from the “dark hoard” was evidently advisable.

Bosses of both companies will pass the polluting parcel on to new stewards. Glencore shareholders will have the choice of keeping shares in the spin-off or dumping them fastidiously on the market. In passing the buck, vendor and acquirer have ensured they will make a few of their own along the way.

The Lex team is interested in hearing more from readers. Please tell us what you think of Glencore’s coal strategy in the comments section below