TECK - Glencore's Future Plans

2023-12-15 13:04:31 ET

Summary

• Glencore formalized its major acquisition in Teck Resources EVR met coal assets to bundle up with its own coal assets for exit from coal by listing the combined company.
• This means two major resource companies (Glencore and Teck) are getting out of coal at a time when there is a planned trebling of renewable energy investments.
• The outcome of these developments is a new energy metal focus for both Glencore and Teck Resources.
• Investors will get an opportunity to investment in a huge coal play and more targeted investment opportunities in Glencore and Teck. Glencore plans to reduce its net debt by 50% on exiting coal.
• Exiting Glencore’s coal business is a big statement which makes Glencore a more forward-focused resources business. The same is true for Teck Resources.

There is a lot of change in the wind for energy and transport as electrification of both sectors takes hold. The reason for this, beyond technology innovation and massive cost reductions, is that there is an urgent need to address greenhouse gas emissions. The science says that raising the global temperature (primarily via CO2 and methane emissions) beyond 1.5C is a catastrophe, even as current projections suggest that the world is on a trajectory to raise emissions by between 3C and 4C. Something has to give soon.

The major fossil fuel producers are aware of the challenge to their businesses and a range of responses is apparent. Exxon Mobil Corporation ( XOM ) is the standout for ignoring the need to address emissions as it dramatically expands its oil & gas production, with a smokescreen about a lithium adventure and storing emissions via CCS (Carbon Capture and Storage) technology that in my view has no prospect of achieving substantial storage. I think time is running out for Exxon. The European oil & gas majors Shell plc ( SHEL ), BP p.l.c. ( BP ) and TotalEnergies SE ( TTE ) all recognize the need to exit fossil fuels and all have various renewable energy investments. However, the recent spike in oil & gas prices has tempted these companies to revert to focus on their oil & gas businesses.

Swiss company Glencore plc ( GLNCY ) is one of the world's largest coal producers, at a time when coal is being targeted for early exit (in part by the oil & gas industry in the hope that coal exit will delay the need to phase down their own fossil fuel industries). Here I look at Glencore's plans for its coal business and how the company plans its reorientation.

Glencore and the acquisition of Teck Resources metallurgical coal assets

Some might think that a recent $6.93 billion cash acquisition of a majority (77%) stake in Teck Resources Limited (TECK) EVR (Elk Valley Resources) met coal business, might signify that Glencore plans to continue with its major role as a global coal business. However, in a mid-November 2023 press release , when a binding agreement was announced, it was made clear that the EVR acquisition would be combined with Glencore's coal assets and demerged to form a standalone company . This is an unambiguous statement that the company plans to cease its role in the coal industry. The Teck EVR acquisition involves a largely met coal business, which still has some prospects, as opposed to Glencore's mostly thermal coal business which is under threat. The logic is that the spinning out of a combined global coal business in the US might attract investors in the US, where emissions are of less concern in some quarters. The timeline is within 24 months from closing the EVR acquisition. The Glencore business post-demerger is planned to involve a 50% debt reduction from $10 billion to $5 billion.

The point is that thermal coal is under threat in many jurisdictions, with the UK coal industry effectively finished, Europe being under great duress and even the US thermal coal industry being in dramatic decline. China and India are both major coal users, but both countries have massive renewable investment programs which are beginning to impact demand for thermal coal. Note that Glencore mentioned in the Q2 2023 report that it already has a responsible coal rundown strategy, with 3 mines closed in recent years and more closures foreshadowed. The Q2 2023 Q&A provides a detailed rationale as to why listing a combined Glencore/Teck coal business, which operates over 4 continents, is a good strategy.

Metallurgical coal still has a major role in the steel industry, but there is also massive investment in exiting a role for coal in steel making. My take is that Glencore's decision to exit its coal industry role reflects a strategic decision to exit profitably at a time when coal is becoming a stranded asset. It also aligns with Glencore's intention to be net-zero in its energy business by 2030. Note that Glencore is not the only company planning to exit its coal business. The Glencore/Teck deal also means that Teck Resources plans to exit coal in favor of a clear focus on its copper (and other relevant new technology metals) business.

Glencore's new focus

The Q2 2023 reporting made clear that Glencore sees its future in a critical minerals portfolio. Specifically mentioned are minerals of relevance to a decarbonized economy, being a big role in copper, nickel, cobalt, and a growing presence in aluminum-alumina, and zinc.

Along with a focus on mining critical minerals, Glencore is growing its recycling business. This means that Glencore can offer customers their own materials, third-party materials, and also recycled materials.

How Glencore is viewed by the market?

Since Glencore is the world's second-largest coal company currently and the EVR acquisition will make Glencore's coal participation even stronger, I suspect a lot of analysts and investors are yet to digest the implications of a near-term exit from the coal industry by Glencore. Perhaps reflecting that coal is seen as the fossil fuel most under threat as a means of emissions reductions, coal stocks don't get a lot of coverage currently. Only two Seeking Alpha analysts have covered Glencore in the last 90 days; both have a "buy" rating. Both analysts cover Glencore's coal activities, but also mention its strong presence in the renewables energy metals industry (copper, cobalt, zinc, aluminum-alumina). There is only one, very positive, "strong buy" rating from Wall Street. By contrast, Seeking Alpha's Quant Rating is "Hold".

My take is that the market is yet to digest a major upcoming transition in Glencore's business, and this potentially provides an opportunity for investors interested in the energy transition from fossil fuels.

Conclusion

It is a very interesting time for investors interested in the dramatic changes coming as the world starts to seriously contemplate the end of the fossil fuel industry. The recently completed COP28 conference has produced outcomes that are most likely seen as inadequate for most interested parties because a lot is at stake for some established and emerging industries. While the importance of limiting emissions to prevent a global temperature rise by more than 1.5C is now accepted by most parties, current actions are leading towards a global temperature rise of between 3C and 4C. Actions to achieve a reduction in emissions have to involve a dramatic reduction in fossil fuel use, yet there was intense discussion seeking to avoid even the mention of fossil fuels. The final communique for the first time ever in COP outcomes, mentioned fossil fuels (" Transitioning away from fossil fuels in energy systems "). This is a big deal because a very large fossil fuel contingent fought hard NOT to mention the need to exit fossil fuels. Of perhaps more importance is the commitment to treble investment in renewable energy. A direct consequence of such investment has to be a reduced need for fossil fuels. It is interesting that renewable energy companies are already showing signs of emerging from a prolonged negative phase. Since late October, Enphase Energy, Inc.'s ( ENPH ) share price has increased from $80 to $120, while SunPower Corporation's ( SPWR ) share price has increased from ~$4 at the end of November 2023 to $6.02 today.

Investors interested in mining related to renewable energy industries, which may have a massive stimulus soon, might look at Glencore in a new light in view of the intention to exit coal mining. Of course, the details of where copper, cobalt, zinc, and aluminum-alumina sit, and how Glencore is positioned, become relevant. As to coal, my followers will be clear that I see coal as an industry in (rapid?) decline, but for investors who think otherwise a new coal entrant with massive global reach might have some attraction.

I am not a financial advisor, but I follow closely the massive changes coming as the world begins to exit fossil fuels. I hope that my comments provide some perspective for investors with an interest in Glencore (or Teck Resources).

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