Glencore Earnings: Materially Lower With Reduced Coal Prices and Energy Market Volatility

No-moat Glencore is keeping its coal business, including the recently acquired 77% stake in no-moat Teck’s metallurgical coal operations, or EVR, in Canada. This reflects most shareholders’ preference—and ours, too, on valuation grounds—compared with demerging and spinning off the business. Demand for EVR’s high-quality metallurgical coal to make steel via the blast furnace process is likely to persist, with alternative green steel technologies unlikely to be economic for decades. While Glencore’s thermal coal is generally lower quality than the high-energy low-ash coal produced by no-moat New Hope and Whitehaven, the energy transition could also be more gradual than many expect. Supply of both types of coal is also likely to be restrained, in our view, supporting long-term or midcycle prices. Metallurgical coal is often lumped in with thermal coal for ESG purposes, and approvals to build new mines or extend or expand existing mines can be challenging. Glencore will use the cash flow from its coal business to finance its growth pipeline, especially in copper, and for cash returns to shareholders.