Photo illustration by The Globe and Mail (Source: iStockphoto)
The mining industry is embarking on a black-to-green revolution that will almost certainly trigger an unprecedented wave of sales and mergers, reshaping the world’s top companies.
Industry bosses told The Globe and Mail that intense pressure from environmental, social and governance (ESG) investors to meet climate targets will prompt imaginative efforts by big mining companies to dump, or greatly reduce, their exposure to their dirtiest, most carbon-intensive assets – mostly coal, oil and iron ore – commodities that are taking on pariah status after having powered two centuries of industrialization.
“We are about to see a game-changing scenario,” said Mark Cutifani, the CEO of Anglo American , one of the world’s biggest diversified mining companies. “At some point soon, there will be a restructuring of businesses and assets, starting with thermal coal.”
Mr. Cutifani and other industry executives and investors said that informal and highly preliminary talks among the CEOs of the big international mining houses – among them Anglo, BHP , Vale , Glencore and Canada’s Teck Resources – plus those in the tier below them are plotting ways to spin off or sell their high-carbon energy assets.
Anglo American CEO Mark Cutifani says he sees a 'game-changing scenario' for mining companies like his.Sumaya Hisham/Reuters
The idea is to make themselves appealing to the rapidly expanding universe of climate-conscious investors – those who demand high ESG standards.
The black-to-green push is also designed to protect the companies from financial risk associated with a rapidly warming planet.
Radical climate change, from Arctic tundra fires and drought to flooding and hurricanes, can damage asset prices. Investors want to know a company’s climate-risk exposure and what management is doing to protect the company from the financial disasters that can come with environmental disasters.
It is these factors that will force companies to reshape themselves, just as the China-led commodities boom of two decades ago inspired an M&A wave that changed the face of the industry.
“There is no doubt that ESG compliance is a huge factor driving the way that people will invest,” said Sir Mick Davis, the former CEO of Xstrata (now part of Glencore), the Anglo-Swiss company that bought Canada’s Falconbridge in 2006.
“ESG imperatives will override everything.”
The latest overhaul would see the big players retain the so-called green, or clean, metals and metalloids needed to transition the economy toward emissions-free power generation, transportation and manufacturing. These include copper, nickel, zinc, lithium, cobalt, titanium, vanadium, graphite, silicon, chrome and a variety of rare earth metals.
Battery-powered electric cars (EVs), such as Teslas, and hybrid cars such as the Toyota Prius require two to four times as much copper as vehicles with internal combustion engines. EVs also require about seven kilos of cobalt, a rare element found mostly in the Democratic Republic of the Congo.
Out the door would go the dirty fuels, notably thermal coal (for generating electricity), oil – especially of the Alberta oil sands variety – and natural gas, though it has a smaller carbon footprint than coal and could live on for decades as a “transition” fuel.
Metallurgical coal might endure for a while, too, for lack of another commercially viable raw material to produce coke, a key ingredient for making steel.
The purpose of the exercise is not to clean up the planet but to give the big mining companies a green tinge that will please ESG investors. If investors vanish, the cost of capital would soar. Shorn from their parent companies, the dirty commodities could endure for decades as standalone businesses, though they too will come under ESG pressure. In that sense, the mining companies are merely transferring their biggest environmental problems to someone else.
Vale, BHP and Anglo might struggle hard to bring down their direct and indirect emissions fast because of their high exposures to carbon-intensive iron ore.
Vale's coal mine in Tete, in Mozambique's Moatize coal basin, is shown in 2010. Natural-resources projects like these have made up an increasing share of global emissions in the past few decades.GIANLUIGI GUERCIA/AFP via Getty Images
How would the dirtiest assets get the heave-ho? Direct sales and spinoffs, which are already under way to some degree, are probably the easiest and fastest methods. There are others.
Mining executives said two or more companies could pool their dirty assets – say, coal mines – into a single company that would seek its own stock market listing or even get purchased by a special purpose acquisition company (SPAC), a blank-cheque corporation that raises money through an initial public offering to buy existing businesses or assets. (SPACs are proliferating in the U.S. and dominated the IPO market in 2020; they are rare overseas.)
Two big mining companies could merge, then shed their dirty assets and emerge as a “clean” mining giant, though getting antitrust approvals in several countries might prove difficult. The term often used in the colourful argot of mining executives is “ShitCo,” the hived-off company that would hold the dirtiest assets, leaving behind “CleanCo” or “GoodCo.”
While each method of expelling high-carbon businesses would be fraught, ranging from the tax treatment of the disposal to capitalizing the dirty fuels company in an ESG world, mining executives and fund managers say they have no doubt it will happen in some form.
Ben Cleary, the CEO of Tribeca Investment Partners – the natural resources investment firm with offices in Singapore and Sydney that has been pushing Teck, a major producer of metallurgical coal, to blow out its grubby oil sands business – said he has no doubt an ESG-inspired restructuring is coming. “I think it will happen,” he said in an interview. “Mining companies today are being driven by major fund managers like BlackRock who are obsessed with killing off thermal coal and other fossil fuels immediately rather than focusing on a transition period to 100-per-cent renewable energy and rewarding low-carbon-emitting fossil fuel producers in the meantime.”
Mr. Cleary said a scenario that would see two or more big mining companies pool their coal assets into a new company makes some sense. “It would give the new company scale,” he said. “Every major mining company is trying to get rid of thermal coal, so why not speak to your competitors and put two or three coal mines together and give the new company the best chance of trading at a higher multiple?”
Teck's Line Creek mine site near Sparwood, B.C., supplies metallurgical and thermal coal.Supplied
ESG investing is nothing new, and a few of the big mining companies have worked hard for years to reduce their carbon footprints to avoid being targeted as climate miscreants. In recent years, ESG pressure has gained momentum at a rate that has alarmed the big polluters, from mining and oil and gas companies to auto and cement makers, forcing them to shred their traditional business models and seek carbon neutrality, also known as net-zero emissions, by a certain date – generally 2040 or 2050.
Rising carbon prices will intensify their desire to reduce their carbon footprints, as will America’s re-entry under President Joe Biden into the 2015 Paris Agreement on climate change.
Former New York mayor Michael Bloomberg, former Bank of England and Bank of Canada governor Mark Carney and Larry Fink, chairman of BlackRock, the world’s biggest financial manager with US$8.7-trillion of assets under management, have warned for years that climate change is a risk to financial stability as well as the planet.
Last week, Mr. Fink ramped up the pressure on companies to clean up their acts with his adapt-or-suffer-our-wrath message. In letters to CEOs and BlackRock clients, he said climate change was behind a “tectonic shift” in investing patterns and suggested that his firm would use its formidable firepower to speed up the transition to a clean economy.
Lack of progress would prompt BlackRock to “not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present risk to our clients’ returns.”
Mr. Cleary called Mr. Fink’s message “very black and white,” in the sense that he is trying to make coal, in essence, a dead commodity. But all fossil fuels are coming under the climate gun. In late January, S&P said it might downgrade the credit ratings of more than a dozen energy companies, among them Canadian Natural Resources, one of the biggest oil sands operators, because of the threat posed by the transition away from fossil fuels and the lunge into clean energy.
In the middle part of the past decade, the big mining companies quietly started to push some of their black assets out the door. Rio Tinto was one of the first. In 2013, the company sold half of its Clermont thermal coal mine in Australia to a Glencore-Sumitomo joint venture for about US$1-billion. Two years later, it sold a 40-per-cent stake in another Australian mine, Bengalla, for US$606-million.
By 2018, Rio was out of the fossil fuels game, the first – and only – top tier mining company to do so. In retrospect, the timing was smart, since thermal coal prices have fallen in recent years and the ESG revolution will make it harder to sell even the best coal assets at a good price. Rio has been making a virtue of its ESG credentials, but its carbon footprint remains high because of its hefty exposure to iron ore.
Thermal coal FOB prices by quality
In U.S. dollars per ton
$140
High value:
Newcastle
(FOB, 6,000 kcal/kg)
120
100
80
60
40
Low value:
Indonesia
(FOB, 4,200 kcal/kg)
20
0
Jan. 2018
July
Jan. 2019
July
Jan. 2020
July
SOURCE: IEA
Thermal coal FOB prices by quality
In U.S. dollars per ton
$140
High value:
Newcastle
(FOB, 6,000 kcal/kg)
120
100
80
60
40
Low value:
Indonesia
(FOB, 4,200 kcal/kg)
20
0
Jan. 2018
July
Jan. 2019
July
Jan. 2020
July
SOURCE: IEA
Thermal coal FOB prices by quality
In U.S. dollars per ton
$140
120
High value:
Newcastle
(FOB, 6,000 kcal/kg)
100
80
60
40
Low value:
Indonesia
(FOB, 4,200 kcal/kg)
20
0
Jan. 2018
July
Jan. 2019
July
Jan. 2020
July
SOURCE: IEA
Last month, BHP, the world’s biggest mining company, announced it would take a write-down of as much as US$1.25-billon on the value of its enormous Australian thermal coal mine – a prelude to the operation’s sale or spinoff to existing BHP shareholders. In 2019, it said the CEO’s compensation would have greater links to reductions in greenhouse gas emissions.
BHP has experience in ditching unloved assets by way of spinoff, allowing it to concentrate on core products, notably iron ore. In 2015, it shunted its alumina, bauxite and metallurgical coal businesses, among other assets, into a company called South32, which has performed well and has a market value of US$10-billion. It might be the model for the coal, oil and possibly iron ore spinoffs to come.
Meanwhile, Brazil’s Vale, owner of Canada’s Inco nickel mining operations, revealed in January that it is preparing its exodus from coal mining. To do so, it is buying out the minority stake of its Mozambique coal business to ensure full control, after which it will try to find a buyer. Japanese trading houses, such as Itochu, are also losing their enthusiasm for coal.
Teck, based in Vancouver, is starting its decarbonization journey too. It is trying to sell its interest in Suncor’s oil sands business. “We are also pursuing a strategy to rebalance our portfolio away from energy and towards copper and other future friendly metals,” said Teck chairwoman Sheila Murray. “We are executing our copper growth strategy, financed by strong cash flows from our zinc and steelmaking coal assets.”
But Teck might earn the wrath of ESG investors who don’t distinguish between metallurgical (steelmaking) and thermal coal – to them, they are both dirty fuels.
Driving these sales, spinoffs and possible mergers is the effort to bring down Scope 1, 2 and 3 emissions – the keys to carbon neutrality. Scope 1 emissions are those produced by a company’s directly owned operations. For mining companies, they include emissions from the diesel mining trucks, for instance. Scope 2 emissions come from products and services purchased by the company, such as electricity from a nearby gas or coal plant. Scope 3 comprises all other indirect emissions in the company’s value chain, notably the use of the products, such as coal and oil, burnt by their buyers.
Scope 3 emission reductions are by far the hardest to meet. For any mining company, more than 90 per cent of emissions are Scope 3 (according to a recent Glencore investor report, the company’s Scope 1 and 2 emissions together are only 8 per cent of their total).
2019 total CO2 equivalent emissions
In million tonnes. % refers to Scope 1+2
share of total emissions
700
Scope 1
Scope 2
Scope 3
2%
600
5%
3%
500
8%
400
300
7%
200
100
0
Anglo
BHP
Rio Tinto
Vale
Glencore
SOURCE: company filings
2019 total CO2 equivalent emissions
In million tonnes. % refers to Scope 1+2 share
of total emissions
700
Scope 1
Scope 2
Scope 3
2%
600
5%
3%
500
8%
400
300
7%
200
100
0
Anglo
BHP
Rio Tinto
Vale
Glencore
SOURCE: company filings
2019 total CO2 equivalent emissions
In million tonnes. % refers to Scope 1+2 share of total emissions
700
Scope 1
Scope 2
Scope 3
2%
600
5%
3%
500
8%
400
300
7%
200
100
0
Anglo
BHP
Rio Tinto
Vale
Glencore
SOURCE: company filings
Any big polluter knows that reaching net-zero Scope 1 and 2 emissions won’t be enough to satisfy the most zealous ESG investors; eventually, they will have to drop Scope 3 emissions to net zero to achieve the cherished halo affect.
All the big mining companies have set net-zero targets by 2040 or 2050, but only one, Glencore, has committed to net zero across all emissions, including Scope 3. It will do so by depleting its massive thermal coal operations. It will be up to the next boss – current CEO Ivan Glasenberg retires mid-year – to stick with the slow wind-down or adopt a faster plan, such as a spinoff. Glencore’s goal is to drop Scope 1, 2 and 3 emissions by 40 per cent by 2035 and reach net zero by 2050.
Vale, the world’s biggest iron ore producer, is targeting a 15-per-cent reduction in Scope 3 emissions by 2035. The net-zero ambitions of the others are limited to Scope 1 and 2, which is work enough and requires imagination. Anglo is trying to nudge the needle by converting mining haulage trucks to hydrogen power.
If investor demand to meet Scope 3 emissions intensifies, as it surely will, the big mining companies will have to accelerate their decarbonization strategies. Some big moves could be made in the next year or two. Sir Mick, the former Xstrata CEO, says non-coal operations, such as any copper mine saddled with high emissions, could get swept into the restructuring process, too. “Any asset with a big carbon footprint, not necessarily coal, will be vulnerable,” he said. “You cannot take a narrow view of ESG compliance. It wouldn’t be just limited to coal.”
Restructuring in the resources sector won't be limited to coal, says Sir Mick Davis, former CEO of Xstrata (now part of Glencore).FABRICE COFFRINI/AFP via Getty Images
None of the mining bosses or investment fund managers contacted by The Globe thought the decarbonization process would be easy. Some companies rely heavily on the cash flow from coal and iron ore sales to pay off their hefty debts. Replacing that cash flow will be the challenge.
Sir Mick and others say another problem is the likelihood that the high-carbon assets would not fetch a big price, since they are engaged in a tainted business. A coal company might trade at half the value multiple of a base metals company. A coal business would have to be largely free of debt and pay a high yield – like a tobacco company – to attract those dividend-hungry investors who don’t much care about ESG standards.
They said the notion of putting two mining companies together before shedding the high-carbon assets, while theoretically possible, would be fraught with antitrust, management and synergy problems.
Merging with Glencore, for example, could be difficult because it is as much a commodities trader as it is a miner, making it a rare hybrid that might not fit well with a pure mining company. On the other hand, Glencore is a leader in producing copper, nickel and cobalt – the three metals essential to electric-car production – and is moving fast to reach net-zero Scope 3 emissions. Those attributes could make it an attractive merger partner for any big mining company having trouble reaching Scope 3 targets.
The mining industry will have to make its decarbonization moves soon, knowing that waiting years to launch the process won’t make the job any easier. “The transition will have to be carefully done, but it will be done,” Mr. Cutifani said.