The CEO of Glencore, Gary Nagle, Contemplates the Unprecedented Move of Spinning Off the Coal Business
When Gary Nagle assumed the position of chief executive at Glencore two years ago, the world was grappling with the effects of the Covid-19 pandemic. At that time, the Swiss mining company had just finalized a deal to expand its stake in the enormous thermal coal mine, Cerrejón, located in Colombia.
Nagle, who had previously overseen Glencore's coal business, witnessed the deal negotiated by his predecessor, Ivan Glasenberg, turn out to be one of the most profitable mining agreements in history. Following Russia's full-scale invasion of Ukraine, coal prices skyrocketed, and in 2022, coal contributed to over 50% of Glencore's record-breaking profits.
However, Nagle, who had gained significant experience in coal mining, is now contemplating an unexpected move that would have been unthinkable when he assumed office: spinning off Glencore's coal business. This decision would result in a substantial separation of the company's metals mining, processing, and trading operations, which encompass nickel, cobalt, and copper mines spanning across Canada and the Congo.
Earlier this year, Glencore proposed an offer to acquire Teck Resources' metallurgical coal business in cash, merge it with its own thermal coal business, and subsequently spin off the newly formed coal behemoth on the New York Stock Exchange.
Nagle expressed his vision during a recent interview in London at a Melbourne Mining Club event, stating, "We would create what would definitely be the world's best coal company. It would have assets in Canada, Colombia, South Africa, and Australia, covering various coal qualities."
The negotiations with Teck Resources are currently ongoing, and the success of the talks will determine whether Glencore proceeds with the spin-off of its coal unit.
Nagle began his 23-year career at Glencore in the coal business, steadily rising to the position of head of coal before assuming the role of chief executive. Despite facing inquiries from shareholders regarding Glencore's coal strategy and an increasing number of concerns about the company's environmental plans, Nagle remains unafraid to defend coal.
He emphasizes, "There is a role for coal, both steam coal and metallurgical coal, in the world as the world decarbonizes." Nagle further explains that steam coal is crucial for meeting the current baseload energy requirements, while metallurgical coal is essential for steelmaking due to the unavailability of substitute technologies.
Glencore's emissions surpass those of many countries, with 380 million tonnes of carbon dioxide equivalent emitted last year. This includes both direct emissions from operations and indirect emissions resulting from coal and product sales. Glencore's emissions are nearly on par with the UK's emissions of 417 million tonnes and exceed those of Spain. If the acquisition of Teck's coal business is successful, the combined company's annual production of both metallurgical and thermal coal would reach 131 million tonnes, approaching Glencore's self-imposed coal production "cap" of 150 million tonnes.
Nagle clarifies that the target was initially intended for Glencore's existing business, and he affirms that the company's thermal coal production will be gradually reduced in line with its emissions targets, aiming for a 15% reduction by 2026 compared to the 2019 baseline. Shareholders hold divergent views on Nagle's plan. One shareholder, Bluebell Capital, demanded Nagle's resignation in a letter to the board last month, arguing that the proposed coal deal contradicts Glencore's climate objectives.
"Glencore has shown no intention of accelerating the transformation into a world-class player in green economy transition metals. Instead, the intention is to become the indisputable leader in coal, both thermal and steel," stated the shareholder.
Other shareholders support Nagle, believing that his background makes him the ideal candidate to lead the spin-off of the coal business. George Cheveley, portfolio manager at asset manager Ninety-One, affirms,
"It's a very important step, and he has the experience to know how to do it. There is a window of opportunity here, and I think they should take it."
Many shareholders and analysts assert that Glencore's share price valuation is dampened by its coal holdings since coal companies trade at significantly lower multiples compared to other mining companies.
Cheveley explains, "The rest of the business is primarily focused on base metals and transition metals. There is an element in which one is holding the other back."
Nagle has been expanding certain areas of the metals business, including making an investment earlier this year in low-carbon alumina refining.
Glencore currently ranks as the world's fourth-largest copper producer, with an annual production slightly exceeding 1 million tonnes. The company has plans to further increase its copper production.
Nagle has also prioritized the growth of the recycling business, which currently contributes less than 1% of Glencore's earnings before interest, taxes, depreciation, and amortization but is expected to experience substantial growth.
Nagle reveals, "Customers are coming to us and asking if we have recycled metal before offering them primary metal. As mining companies, we love exploring the world and extracting resources, but ultimately, we can't continue doing that indefinitely. We also have a responsibility to recycle."
Furthermore, Glencore has repeatedly attempted to acquire the entirety of Teck Resources, including both its coal and metals businesses, which would have significantly increased its copper production. However, these endeavors were rebuffed.
Numerous analysts anticipate that Nagle's focus on expanding the metals and recycling divisions while spinning off coal will pave the way for further deals in the future.
Chris LaFemina, mining analyst at Jefferies, affirms,
"Glencore has been the most aggressive among the major miners in pursuing deals. They have a clean balance sheet, which provides them with the opportunity. Previously, their balance sheet limited them, but now that constraint no longer exists."
LaFemina adds that the current timing is optimal for base metals deals due to temporarily weak metal prices, such as copper, coupled with strong long-term demand projections.
As Glencore embarks on its pursuit of more deals and continues discussions with Teck Resources regarding the spin-off of its coal business, the future shape of the company could differ significantly from its present form.
Nagle himself admits uncertainty regarding the company's outlook in five or ten years, stating,
"What Glencore looks like, we don't know. Not everything is within our control."
In conclusion, the potential spin-off of Glencore's coal business marks a significant turning point for the company and the mining industry as a whole. Under the leadership of CEO Gary Nagle, Glencore is considering a bold strategy that would separate its coal operations from its metals mining and trading ventures. While some shareholders express concerns about the company's climate goals and question the move, others view Nagle's experience and vision as crucial for successfully executing the spin-off.
The decision to spin off the coal business comes at a time when Glencore aims to position itself as a prominent player in green economy transition metals. By focusing on base metals, and transition metals, and expanding the recycling division, the company aims to tap into the growing demand for sustainable mining practices and recycled materials. These strategic moves may also lead to more deals in the future, as Glencore takes advantage of favorable market conditions.
However, the success of the spin-off hinges on ongoing negotiations with Teck Resources. Should the talks fail, Glencore's plans may be put on hold or necessitate alternative approaches. Nevertheless, the potential separation of Glencore's coal business signifies a commitment to aligning the company with evolving environmental and market dynamics.
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