ECONOMICS will play second fiddle to climate change ambitions when Glencore buys out the shares in thermal coal mine Cerrejón from its joint venture partners BHP and Anglo American.
Morgan Stanley said in a report on Monday that BHP and Anglo American would suffer about a $100m “value leakage” following the sale of their 33.3% stakes for a combined $588m. Both have recognised small impairments of between $80m and $100m. The bank calculated a net asset value of $800m to 66.6% of the Colombian mine.
Commenting on the deal consideration, Morgan Stanley said in respect of Anglo’s portion “… this is immaterial in the context of the Anglo American group and would be more than offset by the benefits from the improvement of the company’s ESG profile”.
In a similar vein, the bank viewed Glencore’s decision to take 100% of Cerrjeón as “a pragmatic solution to the future ownership structure as it gives Glencore full control of the asset”. This would enable it to manage the decline in output towards its medium to long-term emissions targets, it said.
Cerrejón is expected to produce 23 million tons of coal in 2021. Glencore said it would allow the coal resource to run down. The decline in production is expected to be significant after 2030.
“Assuming current coal prices hold, the transaction would be accretive to Glencore with a payback period of <2 years (admittedly, the economics of this transaction will matter less than its ESG implications,” said Morgan Stanley.
As the transaction is effective from December 31 and is expected to close in the first half of 2022, the effective deal consideration will be about $230m, assuming current forward coal prices.
Investors place a significant premium on companies striving towards carbon emission reductions with most of the diversified mining companies setting out long-dated targets by which they will cut emissions or be net neutral.
The sale of Cerrejón will complete Anglo’s divestment from thermal coal having demerged its South African mines earlier this month. BHP is also expected to divest its Australian thermal coal assets, possibly through a demerger.
