Glencore's Mt Owen Complex is a thermal and semi-soft metallurgical coal mine in Australia. While the company has pledged to reach net-zero emissions by 2050, it still plans to operate many of its coal operations for years to come. |
Glencore PLC's decision to add coal assets even as other large miners ditched the emissions-intensive fuel has been paying off.
The diversified mining company's stock price rose 128.3% over the two-year period ended July 27, in part thanks to renewed global demand for coal. Meanwhile, two of the other large diversified miners recorded decreased share prices, with BHP Group Ltd. slipping by 0.5% and Rio Tinto Group decreasing by 7.7%. Glencore also outperformed the S&P 500 stock index and Vale SA, which increased by 24.4% and 12.6%, respectively, over the same two-year period.
"There are two main differences relative to Rio Tinto, BHP and Vale. One is the lack of iron ore with Glencore versus the other. The other is Glencore has a large exposure to thermal coal," said Matthew Hodge, a director of equity research at Morningstar Inc. "Thermal coal has done amazingly well in 2022, and that followed a very strong 2021."
Despite falling off a recent high, the Newcastle coal price remained 118.6% higher year over year as of July 27, putting winds in Glencore's sails while some competitors have dumped the black mineral under pressure from activist investors. The company said it plans to wind down coal operations in line with global commitments under the Paris Agreement on climate change, but it's turning a tidy profit in the meantime. Glencore booked a net income of $9.13 billion for 2021, pre-significant items, jumping by 267% year over year.
Seizing profit
Glencore spent the last year scooping up new coal projects. At the end of December 2020, the company's market capitalization was the eighth largest among metals and mining companies analyzed by S&P Global Market Intelligence. In 2022, Glencore and Vale have been in a close race, alternating for the title of third-largest market capitalization in the sector behind BHP Group and Rio Tinto.
The company's higher production total for 2022 is primarily attributable to acquiring the remaining two-thirds of the Cerrejon coal mine in Colombia in a transaction that closed in January. In 2018, the company also bought Rio Tinto's Hail Creek and Valeria coal assets in Australia. Though it sold its relatively small stake in Yancoal Australia Ltd. for A$422 million as of July 27, Glencore has generally been increasing its coal holdings.
Glencore has also profited from its metallurgical coal assets. The price of Australian low-vol coking coal, a global benchmark for steelmaking coal, temporarily increased by over six times in value between early 2021 and March 2022. While the price has since declined, it is still hovering just under $200 per tonne, compared to a price well below $100/t as of late 2020.
Good times for coal companies
Glencore's timing worked out: Power crises in Europe and China have driven up the price of the commodity, as has Russia's invasion of Ukraine. Russia was a coal supplier for Europe, but the European Union plans to end coal purchases from the country, effective August 10, as part of widespread sanctions responding to the conflict. Meanwhile, the price of natural gas, which Russia also supplies to Europe, has jumped. The Dutch TTF day-ahead price for natural gas as assessed by S&P Global Platts has risen more than 440% year over year as of July 26.
"The folly of relying on Russia for energy has been exposed, and Europe is turning back to coal," Morningstar's Hodge said.
The price of Newcastle thermal coal was generally under $60/t through the first half of 2021, but it skyrocketed to more than $300/t by early 2022. The benchmark price was above $200/tonne as of July 22.
U.S. mining companies primarily dedicated to mining coal have also seen jumps in share prices. Investors are turning back to a sector that struggled to attract capital as places such as Europe and the U.S. sharply throttled back coal consumption over the past decade.
But other diversified miners exited coal, trying to shed emissions and fulfill promises to investors and governments, instead funding battery metals such as lithium, nickel and cobalt or other materials essential to an energy transition. While thermal coal prices have remained relatively high, the prices of some of those commodities, such as copper, have dropped in recent weeks, in part due to fear of inflation and slower economic activity.
In addition to higher coal prices pushing up revenues from that segment, Glencore said in a June update that its trading segment is expected to bring in adjusted EBIT of more than $3.2 billion in just the first half, toppling its full-year results for 2021.
While Glencore's exposure to coal has proved an asset in recent months, Hodge said another key to the company's recent performance is what it does not hold. Unlike other large miners, such as Rio Tinto and BHP Group, Glencore does not mine iron ore, a commodity for which pricing has pulled back rapidly in recent weeks. Glencore does, however, market iron ore from third-party producers.
Climate advocates aggravated
The International Energy Agency said in a June 22 outlook on energy investment that about $105 billion was invested in the coal supply chain in 2021, an amount expected to increase another 10% in 2022 as tight supply attracts new projects.
"This is a long way from the market situation implied by international climate goals and the Glasgow commitment to 'phase down' coal," the IEA said in its World Energy Investment 2022 report. "This increase is being led by China and India, the dominant players in global coal markets."
Environmental groups worry that Glencore's approach is not actually getting the world closer to meeting its climate goals.
In December 2020, Glencore announced plans to reduce coal production and achieve net-zero emissions by 2050. Unlike many of its peers who were ditching coal, Glencore plans to wind down coal mines in a "responsible manner," depleting the company's coal reserves over time.
Barclay's analysts have described the plan in favorable terms, noting that the company does plan to reduce its coal production by 50% by 2035 compared to its 2019 baseline.
"Glencore is the only diversified miner with Paris-aligned emissions targets on a Scope 1+2+3 basis, while it also helps underwrite 'higher for longer' coal prices," Barclay's said in a March 9 note. "We do not believe management will deviate from this strategy given the climate change commitment is legally binding. "
Glencore did not respond to a request for comment, but in a February earnings call, CEO Gary Nagle addressed the question of possible investor concerns over the growing share that coal has been contributing to the company's bottom line.
Nagle said the more cash flow the company's coal assets can produce now, the more it will direct to either shareholders or investments in materials essential to decarbonization, such as copper, cobalt or nickel.
"We are putting our money where our mouth is, which is saying, yes, we will run down this business," Nagle said. "We are shutting three mines in the next three years. We are not keeping those mines open because prices are good. We are shutting them down, and we'll continue to do that."
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