Glencore adds Teck mines to global coal business

Unintentional but not unexpected is one way to describe what is happening to the price of steelmaking coal as governments suppress supply in the face of steadily growing demand, a perfect recipe for a higher price.

In that time, high-quality hard coking (or metallurgical) coal has risen 9% over the past three months, to around $264 a ton, and Goldman Sachs forecasts it will rise another 6%, to $280 a ton, before the end of the year.

Multiple factors influence the price of coking coal and its lower-quality cousin, thermal or smoky coal used in electricity production, and environmentalists and governments blame both for causing carbon pollution and climate change.

But lumping all forms of coal into the same basket and limiting supply growth by withholding approvals for mine development, which is what has been happening in Australia and Canada, is having the predictable effect of driving up the price of coal. coking coal even when thermal coal falls.

The gap, and the promise of long-term growth in demand for coking coal, has sparked a burst of corporate activity as some mining companies worried about coal’s prospects quit and others confident the business has a future. brilliant, buy more.

Two recent case studies highlight that point: Whitehaven Coal bought two coking coal mines from BHP in Australia earlier this year, and Glencore is leading a syndicate that is in the process of buying Teck Resources’ steelmaking coal business in Canada.

Investor reaction to the deals has been mixed, but the Teck/Glencore transaction has produced an interesting reaction in the stock market: Teck shares are down 6% over the past month and Glencore is up 8%, the opposite than normally happens in an asset transaction when the buyer falls and the seller rises.

Teck’s fall is also curious because its exit from coking coal has generated $9 billion that management proposes investing in other mining interests, especially copper, which is one of the key metals in the energy transition.

Jonathan Price, president and CEO of Teck, said in a statement last week that the deal would be a catalyst for the company to refocus as a Canadian leader in critical metals.

“This sale will ensure that Teck is well capitalized and able to realize value from our base metals business and deliver strong returns to our shareholders while maintaining a strong balance sheet,” Price said.

Glencore has a different vision, delighted to become the majority owner of Teck’s steelmaking coal business, with Japan’s Nippon Steel and Korea’s Posco as minority shareholders.

But what appears to have caught investors’ attention is Glencore’s long-term goal of incorporating the Teck coal mines into “a stand-alone company” that will also contain Glencore’s other steelmaking coal assets in Australia and Colombia.

The new business, according to a statement from Glencore CEO Gary Nagle, “would be well positioned as a leading, highly cash-generating bulk commodities company, likely attracting strong investor demand given its return potential.”

Jefferies is another investment bank that shares Goldman Sachs’ optimism about coking coal and concern about the prospects for thermal coal.

In a research note published last month, Jefferies said: “The outlook for low-volatility benchmark metallurgical coal may be the best of any commodity, but it is also not greatly underestimated.”