By Felix Ngeni and Pratima Desai
JOHANNESBURG/LONDON (Reuters) – Glencore will retain its coal business after securing support from a majority of its investors who see lucrative returns from the fossil fuel, its chief executive said on Wednesday, adding that the company could acquire more coal assets to make steel.
Glencore (OTC:), which has been advising investors on the potential spin-off of coal assets, reported a first-half net loss of $233 million, after booking $1.7 billion in one-off items, including about $1 billion in impairment charges.
The company’s chief executive, Gary Nagel, added that the London-listed company is “comfortable” with maintaining its primary listing in London but will consider other options if there are significant changes and a reason to move to another exchange. Companies are typically valued higher in the United States.
Glencore recently completed its purchase of Teck Resources’ (NYSE: TK) coking coal assets, and Nagel said the support the company received from European investors to hold on to the coal was overwhelming. Reuters reported on March 22 that investors were keen for Glencore to keep coal mining.
The lack of investment in new coal assets and the prospect of fossil fuels remaining part of the energy mix for years to come are likely to support tight supplies and high prices, which will continue to boost Glencore’s profits.
The coal business generates “tremendous amounts of cash and we can use that cash to pay shareholders through buybacks and through dividends as well,” Nagel said.
He added that investors’ environmental concerns have declined over the past nine to 12 months.
Nagel said Glencore could also add more coal capacity to the steel industry, but declined to say whether it would consider Anglo American’s Australian steelmaking coal assets, which are up for sale.
“At the right price, in the right geography, and in the right quantity, there is no reason why we should not consider additional steel coal acquisitions.”
Glencore shares were up 3.1% by 1439 GMT.
Options
Cash from coal could help Glencore build a war chest to generate returns for its investors while funding deals “including the potential acquisition of some or all of Anglo Steel’s coal assets that are up for sale,” Jefferies analysts said in a note.
However, Glencore said further exposure to coal could put further downward pressure on its share valuation.
“In our view, Glencore could benefit from moving its primary listing to the US, where valuations of US-listed coal stocks have seen a significant revaluation over the past two years.”
Glencore has been canvassing investors on whether to keep its combined coal assets or spin them off after it completed a deal to buy the majority of Teck Steel’s coal business last month.
Glencore Chairman Kalidas Madhavpedi said holding on to the coal assets “provides the least risky path to value creation for Glencore shareholders today.”
Core earnings, or earnings before interest, taxes, depreciation and amortization, fell 33% in the first half of the year to $6.3 billion, hurt by lower commodity prices.
Glencore said adjusted earnings before interest and tax (EBIT) for its marketing division fell 16% from a year earlier to $1.5 billion and was $3 billion full-year, adding that the figure reflected a lower contribution from energy.
The Switzerland-based company expects to generate marketing earnings before interest and taxes of between $3.0 billion and $3.5 billion this year.
“The marketing business is projecting full-year adjusted EBIT of $3.5 billion, which we see as strong in the context of its long-term guidance,” Citigroup analysts said in a note.