Saturday, January 22

Investors pressured mining giants to ditch coal …

It was supposed to be a huge victory for climate activists: Another of the world’s most powerful mining companies had given in to investors’ demands that it stop mining coal.

Instead, Anglo American Plc’s exit from coal has become a case study of unintended consequences, transforming mines that were scheduled for eventual closure into the engine room for a growth-hungry coal business.

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And while it is a particularly clear example, it is not the only one. When rival BHP Group was struggling to sell an Australian coal mine this year, the company surprised investors by requesting to extend mining on the site for another two decades, an apparent attempt to sweeten its appeal to potential buyers.

Now, after years of pressuring front-line companies to stop extracting the most polluting fuel, there is growing concern among climate activists and some investors that the policy many of them championed could lead to more being produced. charcoal for a longer time. Senior mining executives say their shareholders’ message is evolving to recognize that risk, and they are no longer pushing as much for blanket withdrawals.

BHP could end up withholding the Australian mine it was struggling to sell, Bloomberg reported last week. Earlier this year, Glencore Plc surveyed a major group of climate investors before announcing it would increase ownership of a large Colombian coal mine, according to people familiar with the matter.

“Everyone in the industry is starting to get more sophisticated, more nuanced and more careful in the way they think about these issues,” said Nick Stansbury, director of climate solutions for Legal & General Group Plc.

Who should own the world’s coal mines is a question that resource giants and their investors may be grappling with for years to come. At the global climate talks in Glasgow, world leaders have fallen short of the UK host’s ambition to “consign coal to history.” The world’s electricity mix continues to dominate and energy shortages in Europe and China this year have only reinforced the message that the world remains deeply dependent on coal.

The campaign to get coal out of the hands of the largest diversified miners began about a decade ago, with limited success. That changed after some of the world’s most powerful investors, including Norway’s $ 1 trillion wealth fund and BlackRock Inc., began introducing policies to limit their exposure to coal.

In early 2020, pressure was mounting on Anglo American boss Mark Cutifani. It had already seen its rival Rio Tinto Group sell its last coal mines. BHP was looking for options to exit and even Glencore, the biggest coal champion, had agreed to limit its production.

Cutifani’s original plan had been simple: It was increasingly unlikely that Anglo would invest more in its seven South African mines, which represented a fraction of its overall profits, and the company would eventually shut them down when they ran out of coal over the next decade. about.

But for some investors that was not soon enough.

The solution Anglo came up with was a spin-off company, Thungela Resources Ltd., which would be run by a senior Anglo executive and handed over to its own shareholders.

The plan meant that Anglo could leave coal without having to cut jobs in a country facing massive unemployment and leave the mines in reliable hands until they are exhausted. Anglo investors could decide for themselves whether to hold or sell the shares they received.

Julio Ndlovu Photographer: Waldo Swiegers / Bloomberg

However, within days, CEO July Ndlovu raised big ambitions for the company and its mines. Thungela was looking to grow, not reduce coal production, he said.

“I didn’t take this role to shut down these mines, to shut down this business,” Ndlovu told Bloomberg at the time.

The company’s Zibulo, Mafube and Khwezela mines have the expansion potential to add at least another decade of mining and perhaps much more, producing more than 10 million tons of coal annually.

The creation of Thungela has come at a time of great change for the industry. As the global economy recovers from the pandemic, demand for electricity and the fuels used to produce it increased worldwide, causing thermal coal prices to hit the highest levels on record.

That means windfall profits for growers and their investors, making it more lucrative to keep digging as much as possible. Thungela’s shares have soared since its initial public offering in June, although they have recently declined due to lower coal prices.

With billions of dollars and hundreds of thousands of jobs at stake, the question has always been who, if not publicly traded mining companies, should run their coal mines.

Companies like Anglo and BHP have long argued that they are the most responsible operators, with deep pockets and sophisticated approaches to the climate, the environmental impact of their operations, and the well-being of workers. There is no guarantee that the new owners will act in the same way, or that they will have the financial power to weather our volatile fluctuations in commodity prices.

“Selling the problem to a third party has unintended consequences,” said Ashley Hamilton Claxton, chief investment officer at Royal London Asset Management, who argues that mining companies should conserve fossil fuel assets and manage their decline. “We need to change the debate in the investment industry about being more sophisticated about these things.”

It is a theme that has developed elsewhere. Some oil industry observers say activists’ campaigns to get Big Oil to ditch fossil fuels could end up accelerating the shift toward government owners who operate with less transparency and, at times, worse environmental records.

In an attempt to fill the void, other companies have sprung up. Citigroup Inc. and Trafigura Group were one, offering a coal-focused company to investors earlier this year, with the idea that it could acquire cheap mines and exploit them for cash, not growth, before finally closing them.

But there is also growing evidence that investors are changing their approach.

When BHP and Anglo wanted to sell their stakes in a large Colombian coal mine earlier this year, the third partner, Glencore, was the obvious buyer. In the past, a move to increase its exposure to coal could have drawn criticism from climate-focused investors. The company has already agreed in 2019 to limit its coal production, under pressure from Climate Action 100+, an investment group with 545 members managing a total of $ 52 billion of assets.

As Anglo and BHP lobbied to sell the mine, Climate Action became a surprising behind-the-scenes sounding board for Glencore, according to people familiar with the matter. The group saw the transaction as a way to prevent any extensions of the mine or asset from being transferred to a less responsible owner. Glencore agreed to further strengthen its emission reduction targets as part of the agreement.

While Climate Action has not spoken publicly, many in the industry saw the Colombia purchase as further proof that investor positions have fundamentally changed.

Meanwhile, BHP, which has been planning an exit from thermal coal since at least mid-2019, has rejected multiple approaches for its Mt Arthur mine in Australia. The sale has dragged on as the pool of potential buyers dwindled and the offers it received were either too low or rejected because the company did not hold them responsible new owners.

A coal hauler at Thungela’s Goedehoop Coal Mine Photographer: Waldo Swiegers / Bloomberg

Earlier this year, it emerged that BHP had requested to extend the mine’s life by nearly 20 years. Concerned investors soon began to wonder why the company was preparing the mine to continue to extract coal for longer.

Since then, pressure has mounted on BHP to change its exit strategy. Market Forces, which coordinates stakeholder groups on climate issues, has asked the company to abandon plans to sell fossil fuels and instead shut down operations responsibly.

“The big push from investors is to ensure that any divestment that occurs is in the hands of responsible parties,” BHP CEO Mike Henry said at the company’s shareholders meeting in October.

Now the sale process appears to have stalled and the company could end up holding Arthur back, after the coal rally made the asset more valuable, and it is no longer under as much pressure from some investors to sell, people familiar with said. the case.

Meanwhile, Glencore has promised to bring its coal business to closure by 2050, which received overwhelming support from its shareholders, but has also prepared contingency plans to exit in case investors force it. The events of the past six months suggest that it seems less likely.

“Divestment is convenient and easy to communicate,” said Hamilton Claxton. “Helping companies manage decline is difficult to do from an investment perspective and showing our clients that we have been effective is difficult to do.”

© 2021 Bloomberg

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