At the peak of the environmental, social, and governance frenzy in 2021 as investors piled into green assets, Anglo American demerged its South African thermal coal mines with then chief executive Mark Cutifani citing the need to “act responsibly”.
In the next two years, Glencore — the world’s biggest publicly listed coal producer — made core earnings of $51bn and returned a record $17.4bn to shareholders thanks to skyrocketing coal prices after Russia’s invasion of Ukraine roiled energy markets.
As prices cooled last year, the Swiss miner and commodities trader pledged to follow Anglo by separating into a coal producer floated in New York and a metals company as part of its takeover pursuit of Canada’s Teck Resources, which was plotting a similar break-up.
But on Wednesday, the FTSE 100 company made a striking U-turn and dropped plans to spin off the coal arm, the biggest proposed overhaul of the commodities behemoth in more than a decade, attributing the pivot to a sea change in investor sentiment towards fossil fuels over the past year.
“The pendulum has swung on ESG over the last nine to 12 months,” said Gary Nagle, the South African chief executive who rose through the ranks. “They [investors] still do recognise that cash is king and that is always the case.”
He added: “There’s an understanding that energy is required today as we transition to a decarbonised future and it has to come from fossil fuels in many cases.”
Glencore’s decision underscores a dilemma for the world’s largest miners and investors: how to live without king coal’s bumper returns that can be used to fund huge payouts and future growth in minerals for clean technology such as copper and cobalt?
“The proposed coal divestment would have left an odd rump company unable to provide the significant distributions to shareholders of the prior Glencore,” said Richard Buxton, a former fund manager who owned the stock for a decade. “Scrapping the plan makes them much more attractive again.”
The commodities trader, which generated 433mn tonnes of CO₂ in 2023 — more than entire countries such as the UK or France — has followed energy majors BP and Shell in backtracking on efforts to court ESG investors, instead doubling down on oil and gas.
Glencore has long argued against the push by environmental activists for fossil fuel producers to divest. It has advocated that coal assets are better run down by responsible, accountable operators as developing nations in Asia and Africa still need coal to power their economies.
But coal has whipped up controversy for Glencore and other miners, which have faced escalating pressure from investors and banks to cut their exposure in the past decade.
The burning of fossil fuels for energy and heating makes up the majority of greenhouse gas emissions behind global warming, with coal producing more than any other single source.
In particular, thermal coal, used to generate power and perceived to have readily available replacements in gas and renewables, is the most contentious. Metallurgical coal, which is used to make steel, is more palatable given continuing infrastructure demand and the lack of alternatives.
Rio Tinto was the first major miner to fully exit coal in 2018. Anglo will join them after selling its metallurgical coal mines, the first step in its radical portfolio overhaul. BHP made its own reversal in 2022, deciding to run down a thermal coal mine instead of selling it as it aims to develop a portfolio of high-quality steelmaking coal assets.
“There are quite a lot of similarities between what BHP and Glencore are doing,” said James Whiteside, head of metal and mining corporates at Wood Mackenzie, a consultancy. “The difference is the scale of Glencore’s coal business.”
If Glencore keeps paying out roughly half of its operating cash flows at today’s valuation, the average dividend yield would be almost 20 per cent between 2024 and 2026, well ahead of rival miners, he said. For those who ditch coal, the bumper profits will be sorely missed.
“Around Anglo, the question that we’re trying to answer is how do they fund their future growth projects with such a shrunken portfolio without coal and diamonds,” Whiteside added.
Nagle has lashed out at ESG investors as box-tickers. Last year, he blamed “some ESG person in the basement in office number 27” for an increase in dissent towards its climate change plans.
In June, Legal & General Investment Management announced plans to sell some of Glencore’s shares because of concerns over its coal production and commitment to reducing carbon emissions.
But other investors agree with Nagle, saying ESG is simply a trend.
“Glencore has probably realised ESG is a fad, hence the decision not to spin out the super profitable coal business,” said Barry Norris, a fund manager at Argonaut Capital, which is not a shareholder in the company.
In evidence of an ESG mood shift, Nagle pointed to increased support for its climate strategy, which rose to more than 90 per cent at its annual meeting of shareholders in May, up from about 70 per cent a year ago. However, some said that comparison was irrelevant.
“Existing shareholders are, by definition, those who are allowed to own coal,” said one investor in the company. “So when asked whether to keep coal or have it spun off, the latter has more uncertainty.”
That has led some cynics to question whether Glencore’s move really represents a major shift in investor attitudes on climate change or whether Nagle is using them as a smokescreen for the company’s U-turn.
The origin of Nagle’s proposal to spin off coal was a tactic in a takeover battle for Teck Resources, a mining company that was planning to split itself into a coal and metals group.
Eventually, an agreement to sell a majority stake in Teck’s steelmaking coal business to Glencore for $6.9bn was reached in November with the Swiss group declaring its own break-up would still stand.
“The proposal to spin out the coal assets came from Glencore and Gary Nagle and it wasn’t a significant push from investors,” said Naomi Hogan, company strategy lead at the Australasian Centre for Corporate Responsibility.
She added: “It’s not a simple case that investors aren’t interested in ESG. It’s much more complex. They want to have a seat at the table to encourage Glencore to be more transparent.”
Investors were concerned about a standalone Glencore coal company going down the path of other similar producers such as Thungela, Anglo’s spin off, in terms of focusing on boosting production and returns at the expense of cutting emissions.
Now, they are concerned whether Glencore will stick to its word to close seven more coal mines by 2035 to cut emissions in half and how the approximate 20mn tonnes of steelmaking coal inherited from Teck will fit into its climate strategy.
While Glencore has put to bed uncertainty over coal’s near-term future, some shareholders expect plans to split the company could return if it makes a major acquisition. This could be helped by coal profits and the extra firepower from the retention of its net debt cap of $10bn. It had planned to reduce it to $5bn within 24 months under the coal split.
“The company is always open to M&A,” said Nagle, adding coal’s returns could also fund organic growth or share buybacks. “It’s part of our DNA.”