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After announcing a deal to buy the coal business of Canadian miner Teck Resources, Glencore hopes to merge this with its own coal unit, before spinning it off and listing it on the NYSE in a few years. Whether or not investors buy in is critical for the future of Glencore, says Javier Blas.
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The last time commodity behemoth Glencore tried to sell a standalone coal business to the public, its then chief executive officer claimed everyone was "horny as hell" for the fossil fuel. He wasn't wrong. It was 2001, China was about to embark on a coal-fired industrialisation, and Wall Street loved fossil fuels. Big Oil, rather than Big Tech, was king of the stock market.
Can the company swing the same argument in 2026? After announcing a deal to buy the coal business of Canadian miner Teck Resources, Glencore hopes to merge this with its own coal unit, before spinning it off and listing it on the New York Stock Exchange in a couple of years. Talk to Glencore executives, and they exude confidence that this plan will work. Coal is hugely polluting, but also a cash cow. They believe American investors love green — the green of the dollar, that is. And they're probably not wrong, even if the company is making a hell of a planet-wrecking bet.
Whether or not investors buy in is critical for the future of Glencore, one of the world's largest and most influential commodity companies.
Yet, as profitable as the commodity is, coal has been a drag for Glencore, putting off many European investors. For example, the sovereign wealth fund of Norway, the largest single owner of the world's stock markets, blacklisted Glencore in 2020. As a result, the company, which on top of coal digs copper, zinc, nickel and several other base metals, trades at a price-to-earnings multiple of about seven times — significantly below the 12-to-15 times for mining rivals such as BHP Group, Rio Tinto and Anglo American.
Glencore has long known that the only solution is to spin off coal. But doing so isn't easy. Its coal business hadn't been large and diversified enough for the part to be worth more than the whole. Inside the company, the view was that any uplift from spinning off the coal unit would be smaller than the loss of its value. So to get a spinoff to actually work, Glencore needed a larger and better coal business.
Now, with Teck's steelmaking coal, produced in a stable and reliable jurisdiction like Canada, it probably has this. Today's high coal prices should help, too.
Glencore set the clock ticking for the spinoff on Tuesday when it announced it led a consortium to buy Teck's coal business for $9 billion, including debt. Glencore is the majority partner, taking 77% of the total at a price tag of $6.9 billion. The transaction closes a months-long corporate battle between Teck and Glencore. On its own merits, it's a great deal for Glencore CEO Gary Nagle: He's paying about 5% more than his first offer, and getting the kind of mining asset that seldom changes hands — one with a long life, a low production cost and in a good geography.
But getting the coal unit of Teck was the easier part; nothing will matter if Nagle cannot pull off the rest of his plan. He aims to 1) merge the Teck coal business, which produces about 20 million metric tons of metallurgical coal used in steelmaking, with Glencore's own coal unit, which digs 110 million tons of mostly thermal coal used for electricity generation; and then 2) spin off the resulting company, listing the shares in New York, Toronto and Johannesburg. From there, shareholders would have a choice: sell or keep the shares, and the market would put a price on the coal business.
At current coal prices, the combined Teck-Glencore coal business would probably generate annual earnings before interest, taxes, depreciation and amortisation of about $10.5 billion, according to my own calculations. Apply the multiple Glencore paid for the Teck business, and you get a valuation of about $25 billion at today's prices. Wall Street analysts, surely, will produce even higher valuations when the time comes.
"There seems to be a very, very strong appetite in the market, and particularly the United States, for a business of this size, of this scale, of this cash generation," Nagle says.
Perhaps $25 billion doesn't sound like a big sum in the world of finance. But in the world of listed coal companies, that's a lot. Peabody Energy Corp., currently the largest US-listed coal business, isn't even worth $3 billion, net of debt. The biggest Australian and South African-listed coal companies are even smaller. One needs a lot of institutional money to get such a lofty valuation. Still, look at tobacco: Altria Group Inc., the maker of Marlboro cigarettes, is worth $70 billion, plus another $25 billion in debt.
So Glencore has a chance to make it work. After all, coal demand will hit an all-time high this year, according to the International Energy Agency, and it's likely to increase again in 2024 and probably in 2025. After that, I don't anticipate a significant drop for a few years, as China, India and others will remain reliant on the fossil fuel. Despite historically high prices, coal miners aren't investing in new production, which is slowly squeezing the market and therefore prolonging high prices.
By 2026, the world may consume about 80% more coal than it did a quarter of century earlier, when Glencore tried to sell shares of its then fledgling Australian and South African coal businesses. We're too polite to admit the global economy remains, even in the age of the climate crisis, as "horny as hell" for coal as it was in 2001. But, painfully, it is. And that's Glencore's advantage.
Javier Blas is a Bloomberg columnist.
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