The spotlight turns to coal in Glencore as pressure on climate plans mounts

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Glencore is primed for heated debate about its highly profitable coal mining business when it meets with shareholders this week as the group is under pressure to tackle climate change.

A growing number of shareholders support a resolution asking the company to explain how its thermal coal production – the largest of any company outside of China and India – is compatible with its climate goals.

Legal & General Investment Management, Allianz, Scottish Widows, Man Group and HSBC Asset Management have all supported the measure in recent days, as have proxy advisors Glass Lewis and Institutional Shareholder Services.

This Friday’s annual meeting comes as Glencore’s $23 billion hostile takeover bid for Canadian group Teck Resources has raised new questions about whether the Swiss miner could spin off its coal Business.

The division is highly profitable, accounting for 53% of earnings last year, but is believed to be dragging down Glencore’s overall valuation due to associated climate risks.

Glencore had proposed buying Teck, then splitting the merged business into a separately traded coal company and a standalone metals company, recognizing that more value could be created by doing so.

“This deal for me marks an interesting starting point for Glencore, which up to now has said it plans to keep coal as part of the portfolio, but to liquidate the assets,” said Tal Lomnitzer, senior investment manager at the asset manager. Janus Henderson, one of Glencore’s shareholders. “Regardless of whether this deal [with Teck] happens, the likelihood of them sharing the coal is increased.”

Glencore’s coal resources stretch from Australia to South Africa to Colombia, and it mainly extracts thermal coal, which is burned in power plants. Producing 110 million tons of fossil fuel annually, the company is the world’s largest producer of thermal coal outside of China and India.

The Swiss mining and trading house, headquartered in Zug, also has an extensive network of metal mines and industrial facilities, including battery recycling, aluminum smelting, and copper and cobalt mining. Its commodities trading arm ships commodities worldwide and trades products from crude oil to carbon; the division accounted for a fifth of group earnings last year.

Glencore says it is focused on growing its metals business and producing materials such as copper, cobalt and nickel that are essential to the energy transition. Deals such as a $1.1 billion aluminum deal with Norsk Hydro and construction plans The largest battery recycling facility in Europe in the Italian island of Sardinia, are among his recent investments in this sector. The company also has plans to double its copper production.

Instead, its coal strategy is to responsibly reduce its existing coal mines to the end of their life cycles, planning to close 12 of them between 2019 and 2035. According to current projections, the group will continue to produce coal after 2040.

However, a handful of shareholders have been calling since 2021 for Glencore to spin-off its coal unit, due to climate risks and the vastly different growth trajectories of its coal and metals operations.

“When you look at the Glencore facility, you see there’s a lot of value trapped there,” said Jefferies analyst Chris LaFemina. “The coal business appears to be depressing the valuation of the whole business.” The miner’s nearly 50 percent stake in Viterra, an agricultural trading company, was also undervalued, he added.

Glencore chief executive Gary Nagle, who cut his teeth running the company’s coal business before taking on his current role two years ago, said shareholders at the time wanted the coal business to stay put. within the company. But if that position changed, he added, he would follow suit.

“If there was strong shareholder support to divest, that’s something we would do,” Nagle told investors in April.

Glencore has committed to reducing its emissions, both direct and indirect, by 15% by 2026 and 50% by 2035, compared to a 2019 baseline. But has refrained from setting a specific target for production reductions of coal, which is its main source of Scope 3, or indirect, emissions.

At Friday’s AGM, the Coal Disclosure Resolution should bring all of these issues into sharp focus.

Resolution calls on Glencore to disclose how its projected thermal coal production aligns with the Paris Agreement goal of limiting global warming to 1.5C and detail how the company’s investment plans fit align with those projections.

“This resolution is extremely important in assessing transition risk,” said Naomi Hogan, head of strategic projects at the Australasian Center for Corporate Responsibility, which coordinated the resolution. “Both for now and for everything that comes after, for current shareholders and for future shareholders.”

The resolution does not call for Glencore to abandon its coal business.

Glencore opposed the motion, arguing that it seeks to influence strategy, which is a matter of the board’s purview, and which is unclear.

LGIM – the UK’s largest asset manager and an early sponsor of the resolution – said it was disappointed with Glencore’s response to the resolution. Glencore held an hour-long meeting in March with supporters of the measure.

“We had hoped that this engagement would start a little earlier and that there would be a constructive follow-up,” said Dror Elkayam, ESG analyst at LGIM. “This is a shareholder resolution, but we want to work with the company. . . This takes more than a conversation.

While the information requested is not much different from that already disclosed by Glencore, the managing consultants stressed that additional information would be helpful in evaluating future climate measures.

“The requested information will assist shareholders in evaluating the Company’s 2024 climate plan,” Glass Lewis wrote in a recent research note. Similarly, the ISS recommended a vote for the resolution in its report, which also rated Glencore’s carbon risk as “high.”

The ACCR resolution is unlikely to get the 50% vote share needed to be binding, because Glencore’s largest shareholders would have to side with management. But the measure could still trigger a mandatory consultation process if more than 20 percent of shareholders vote against management and in favor of the resolution.

Such an outcome would echo last year’s AGM, in which 24% of shareholders voted against Glencore’s climate plan, triggering a consultation process.

The company has consulted with its “major” shareholders, formally engaging with about 85% of the register, but some minor shareholders said they were left out.

Giuseppe Bivona, chief investment officer at Bluebell Capital, said his firm hasn’t been approached once, despite his outspoken criticism of Glencore’s climate plans and his calls for a coal spinout.

“When you refuse to speak to the most outspoken shareholder, it is a message of general contempt towards all dissenting shareholders,” Bivona said.

As Glencore navigates AGM, questions about the future of its coal business will continue long after Friday’s vote.

His hostile bid for Teck may also be revived in the coming weeks. Teck’s board declined to engage in talks, but Glencore has indicated it will consider approaching shareholders directly with a better offer.

LaFemina, the Jefferies analyst, believed big changes could be afoot. “Clearly there’s a major restructuring that they’re considering. You merge with Teck, coal spinoff, Viterra IPO,” she said, referring to the agricultural trade group.

Given that environmental, social and governance concerns were a growing factor, he thought a coal spinout might come sooner rather than later. “The longer you wait,” LaFemina said, “the harder it’s going to be to do.”