August 2, 2019 / 3:17 AM / 4 months ago

Breakingviews - Glencore coal split could scratch multiple itches

FILE PHOTO: The logo of commodities trader Glencore is pictured in front of the company's headquarters in Baar, Switzerland, July 18, 2017. REUTERS/Arnd Wiegmann/File Photo

HONG KONG (Reuters Breakingviews) - A Glencore coal split could scratch multiple itches. The $42 billion commodities giant is the world’s largest thermal coal exporter, at a time when miners are under growing pressure from investors to clean up. Separating the dirty fuel from the rest would help that, and more. It might even make sense for boss Ivan Glasenberg to lead the carve-out.

Coal, where Glasenberg cut his teeth, made up roughly a third of EBITDA last year. That’s thanks to a jump in prices mid-year, but high margins have made it a reliable cash generator. Even so, tougher environmental, social and governance rules at large funds could prove costly for miners like Glencore, which also digs metals essential to the green economy, if they get cut out.

Carving out thermal – along with less significant coking coal production - would burnish environmental credentials more than a February decision to cap output. It may also shine a light on a lacklustre valuation. With forecast 2019 free cash flow of $6.3 billion, according to Refinitiv, and rivals’ yields at around 10%, Glencore should be worth over $60 billion; instead, it has a market value just two-thirds of that.

Of course, that discount is not just coal: there are problems with copper and a U.S. Department of Justice investigation. But a separately listed coal business could follow coal-to-aluminium producer South32, which has had an annualised total shareholder return, in U.S. dollars, of over 10% since splitting from BHP in 2015. Glencore’s equivalent is some minus 7%.

A split could even solve Glencore’s succession question. Building an acquisitive coal powerhouse focused on Asian demand would make an eventual Glasenberg departure less of a step down. Assuming EBITDA of $5.2 billion for 2019 and the multiples on which rivals trade, a coal-only entity could be worth $26 billion. Factoring in leverage around 3 to 4 times EBITDA, that would leave $8 billion of equity to be raised - tough but not impossible, with Glasenberg’s Glencore equity and a name to woo partners.

None of this is on the cards - yet. A split would have to factor in Glencore’s coal trading operation, which has serious working capital demands. Still, the group has sustained long relationships trading minerals with companies it doesn’t own. Coal is unloved and lucrative. Split it off, and it can happily remain so.

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