In a surprising turn of events, Glencore has reversed its 2023 decision to spin off its newly expanded coal business. The lure of continued coal profits, particularly coking coal from the Elk Valley Resources acquisition, proved too strong for shareholders and management alike.
Glencore initially planned to combine its existing coking and thermal coal mines (primarily in Australia) with the Teck Resources coking coal operations acquired in Western Canada for $US6.93 billion. The plan was to create a standalone coal business within 24 months of the deal closing (around 2026).
Debt reduction was initially a key factor. Glencore proposed lowering its debt from $US10 billion to $US5 billion to gain support from shareholders and banks wary of the company’s high debt levels.
However, consultations with shareholders revealed a preference for retaining the coal business’s cash-generating potential. This, combined with the belief that coal, particularly high-grade coking coal, will remain part of the global energy mix for some time, led to the reversal.
“The expected cash-generative capacity of the coal and carbon steel materials business significantly enhances the quality of our portfolio,” stated Chair Kalidas Madhavpeddi on Wednesday. “This broadens our ability to fund copper growth options and accelerate shareholder returns.”
Glencore’s decision comes despite a net loss of $US233 million for the June half, compared to a $US4.57 billion profit in the same period last year. This shortfall missed analyst expectations of a $US1.72 billion profit and included $US1.7 billion in significant items, including $US1 billion of impairment charges.
Glencore justifies its decision by citing a lack of investment in new coal mines and a belief that tight supplies and high prices will continue. The company maintains its commitment to a “responsible decline” of thermal coal operations and a slower transition away from steelmaking coal.
“Glencore has always viewed the demerger question as a matter for shareholders,” the company stated. “Investment in coal is often a question of investment preference.”
Glencore’s thermal coal production fell 7% to just under 51 million tonnes due to a mine closure in NSW and transport issues in South Africa. Full-year 2024 production is now provisionally expected to be between 98-106 million tonnes, down from 107 million tonnes in 2023.
Debt Reduction Plans Shift
The original plan involved managing the post-demerger balance sheet to a revised $US5 billion net debt cap. This replaced the existing $US10 billion cap. Glencore also reaffirmed its commitment to maintaining strong BBB/Baa ratings.
However, with the decision to retain the coal business, the debt cap reverts to $US10 billion (excluding marketing-related lease liabilities). The company emphasizes its continued commitment to strong BBB/Baa ratings.
While the majority of shareholders may now be content with the retained coal assets, the issue of high debt levels could resurface. The company acknowledges this by reserving the right to “consider a demerger of all or part of this business in the future if circumstances change.”