Glencore’s split is yet to be copper-bottomed
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Karen Kwok
LONDON, Dec 6 (Reuters Breakingviews) -Gary Nagle’s big deal is supposed to just be a start. The chief executive of $70 billion miner Glencore GLEN.L last month bought 77% of Canadian peer Teck Resources’ TECKb.TO coal division for $6.9 billion, but his real vision is to merge it with his own company’s coal arm and spin the enlarged entity off. Yet that depends on a few things out of his control.
Teck and Glencore are already something of a saga. Nagle’s initial proposal was to merge Glencore with the whole of Teck, then spilt the combined group into separate coal and metal businesses. After Teck rejected that plan, Nagle eventually settled for buying just the coal arm.
This Plan B has some benefits. Glencore trades at just 3.9 times expected 2024 EBITDA, close to the likes of Rio Tinto RIO.L, RIO.AX but below the 7.4 times average of $54 billion Freeport-McMoRan FCX.N, $57 billion Southern Copper SCCO.N and $18 billion Antofagasta ANTO.L, miners focused on metals that will be integral to the energy transition. Part of the discount is because of Nagle’s thermal coal business, which faces an uncertain future as cheap renewable energy renders the fossil fuel redundant for power generation.
Buying Teck’s coal business may reduce that discount. Teck makes coking coal, which remains essential to steelmaking. Its peer group currently commands an average valuation of 3.1 times 2024 EBITDA, compared to 2.5 times for thermal assets like South Africa’s Thungela Resources TGAJ.J. Combining the two businesses will dilute the contribution from thermal coal, making the enlarged business easier to spin off from the metal part at a higher valuation.
Still, a clean metals-dirty coal breakup, which perhaps would take a few years given the current coal merger will need regulatory approvals, might also leave Glencore’s metal business with less cash to spend. A bumper payout from selling coal amid an energy security crisis had supported Glencore’s cash flow. In 2022, the fossil fuel contributed over half of group EBITDA.
Meanwhile, it’s not totally clear what valuation investors will place on Glencore’s remaining pure metal business. Freeport and Southern Copper trade at a premium because they derive a higher proportion of revenues from copper than Glencore, which also produces cobalt and nickel. There’s also a question mark over Nagle’s profitable energy division trading oil, coal and carbon credits. That sort of business needs major bank financing, which might get more expensive if it was hived off with a dirty coal business. But if Glencore opts to keep some or part of it within the metal arm, it may drag down its overall multiple.
What Nagle ends up doing may ironically depend on Teck. Having sold its coal business, the Canadian company offers a live experiment of how investors think about newly separated pure-metals stocks. If the stock rises from its current multiple of 5 times 2024 EBITDA to the levels of the likes of Freeport, Nagle and his shareholders will be more likely to press ahead with the second part of his plan. If not, Glencore’s hybrid model may persist for some time.
Click here for an interactive version of the graphic.
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CONTEXT NEWS
Glencore on Nov. 14 said it had agreed to buy 77% of Teck Resources’ steelmaking coal business for $6.9 billion on a cash and debt-free basis, implying an overall enterprise value of about $9 billion.
After combining Teck’s coal unit with his own, Glencore boss Gary Nagle plans to de-merge the business.
He said on Nov. 14 that this breakup should happen within two years of the deal’s closing date, once Glencore has sufficiently de-levered, which he is expecting will take place in the third quarter of 2024. Nagle said it is not yet clear where Glencore’s profitable energy trading division would sit.
Graphic: Mining valuations https://tmsnrt.rs/480xYec
Editing by George Hay and Oliver Taslic
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