Miners like mines.
They like planning them. They like building them. They like running them. They don’t like selling them. In fact, they find it so difficult they sometimes end up giving them away.
Anglo American is handing its South African thermal coal assets to its own shareholders, in the form of a demerger into a Johannesburg and London-listed company called Thungela.
Such is the toxicity of coal that getting shot of perhaps 3 to 4 per cent of Anglo’s earnings this year was good for a bump in the group’s share price. Shareholders will doubtless approve the deal.
It’s still likely to be an unappealing bundle for many. Reluctance among global institutions to invest in miners with exposure to thermal coal is what’s pushing Anglo to get rid of these assets. The likelihood is that some investors either can’t or don’t want to hold a pure-play South African thermal coal miner, meaning a turbulent start for the spin-off.
But the demerger really reflects the mess that the biggest mining groups have found themselves in over coal.
Anglo, like most of its peers, failed to get out of thermal coal when it had the chance. Its South African coal assets were decreed strategically non-core back in 2016 as part of a simplification intended to reduce its commodities from nine to three. A year later, as prices rallied, they were brought back into the fold.
It managed to shed its domestically focused mines shortly after. But has been left holding the higher-quality export mines as the investment tide has turned against the commodity (and after the demerger will still have a sliver of thermal coal through its stake in Colombia’s Cerrejón mine). These mines, tiny and lossmaking as of last year, have been a disproportionately large headache for the group.
The miners are now rather damned if they do and damned if they don’t, given the complexities of the ESG debate around how they could or should handle their coal assets.
Adam Matthews, at the Church of England Pensions Board, tweeted approvingly that Anglo’s deal was a “careful transfer . . . with community ownership”. The company argues that a listed company with good management maintains accountability and scrutiny of the assets, and puts them into the hands of better, more committed owners.
Others disagree. Tim Buckley, at the Institute for Energy Economics and Financial Analysis, calls it an “abrogation of responsibility” that reflects the fact that these assets are now unsellable and is bad for workers, investors and the planet. The new standalone company is probably more motivated to invest to lengthen the mines’ lives from up to 11 years to closer to 20 years.
Whether that is possible remains to be seen. Even in a hot thermal coal market, the investment needed to keep the mines running accounts for over half their Ebitda in the next couple of years, on Berenberg’s numbers. The new business must also find money each year to set aside in its “green fund” to cover end-of-life liabilities that are currently less than half funded.
And the reality is that the demerger will distance Anglo from its thermal coal assets, rather than sever the links entirely. The group is sending Thungela on its way with $170m in cash, and will continue marketing the coal for three years. There is additional near-term support on offer if benchmark prices fall below $80 a tonne (compared to an average of about $90 this year, but $58 for 2020, notes Bernstein). It’s also hard to believe that any future issues around Thungela, or the decommissioning of its mines, won’t land back at Anglo’s door.
Anglo wants to spend more time discussing its “future-enabling” commodities, like copper, nickel and crop nutrients. But it immediately faced questions about one of the future-disabling units it has left, coking coal. The world still needs coking coal in steel making for the foreseeable future and Anglo boss Mark Cutifani commented that anyone suggesting getting rid of it needed their “head read”.
It is only a matter of time though. Perhaps the wise heads of the mining sector will do better at spotting the right moment to get out of the next of yesterday’s commodities than they did the last one.