Citi [C] and Trafigura have come up with a plan to align coal mining with more environmental values.
In an attempt to prevent energy firms from offloading mines to less scrupulous companies in order to meet sustainability targets, Citi and Trafigura are encouraging coal giants to invest more in alternative energies. At the same time, they are pushing for pledges to close the mines completely by 2045.
Coal to Zero plans to buy the best mines from coal miners and run them for a profit until 2045. Investors will get an annual dividend, while a percentage of profits will go to local communities. The initiative is in its early stages and is currently being shopped around institutional investors and ESG thought leaders. Citi has already said it will stop financing coal miners in the next decade.
“Citi is discussing an investment vehicle with a group of sponsors that will facilitate an orderly transition in the coal mining sector,” the bank said in a statement. Coal to Zero “aims to deploy private capital to support an orderly exit from coal in a way that is fair to the people and communities impacted. In doing so, it intends to generate a positive, measurable environmental and social impact alongside a financial return for investors.”
“Citi is discussing an investment vehicle with a group of sponsors that will facilitate an orderly transition in the coal mining sector... In doing so, it intends to generate a positive, measurable environmental and social impact alongside a financial return for investors” - statement from Citi
According to a pitch document seen by Bloomberg, Coal to Zero’s aim is to become an “energy transition vehicle focused on global decarbonization … by retiring coal assets significantly before the end of their minable life.”
Why Coal to Zero could benefit big miners
Big coal mining companies have been under investor pressure to reduce thermal coal production for some time. An IEA Global Energy & CO2 Status Report in 2019 found that coal was the single largest source of global temperature increase.
BHP [BHP] and Anglo American [AAL.L] had once argued that they were best placed to deal with winding down their own coal mines. However, shareholder pressure has meant the miners are now looking to offload coal assets to new owners. Simply handing over a mine to a new owner doesn’t mitigate the environmental impact, however. There is a risk that the new owner might not be as open to scrutiny as a large, publicly listed company. Coal to Zero could help to improve the process, even if mining until 2045 is less than ideal.
In January, BHP, the world’s largest miner, slashed the value of its Australian coal mining assets as it looked to sell its New South Wales unit. BHP is looking to shift to commodities that will be needed in the move to cleaner transport and power, like copper and nickel. It is also planning to produce raw materials for steelmaking.
Anglo American shareholders voted to spin off its South African thermal coal mining unit into a new company in early May. This followed a 20% year-on-year drop in thermal coal production in the first quarter. Like BHP, Anglo is looking to pivot towards other commodities.
“Anglo American's portfolio is increasingly tilted towards future-enabling metals and minerals, with our recently proposed demerger of our thermal coal operations in South Africa moving us further in that direction” - Mark Cutifani
"Anglo American's portfolio is increasingly tilted towards future-enabling metals and minerals, with our recently proposed demerger of our thermal coal operations in South Africa moving us further in that direction,” said Mark Cutifani, non-executive director of Anglo American Platinum and Total S.A.
“We are also making good progress in ensuring every operation plays its part towards a lower carbon world, with 100% renewable electricity supply now secured for all of our operations across Brazil, Chile and Peru.”
Commodity supercycle fuels mining stocks
Commodity prices have boomed, fuelled by shortages of key metals. Copper prices, iron ore and steel prices have all surged higher in what has been termed a commodities supercycle. In turn, this has propelled big mining companies’ stocks higher.
BHP’s share price has bounced 6.67% so far this month, and 17.37% since the start of the year (as of 12 May’s close). Anglo American has enjoyed a similar performance, up 4.47% for the month and 25.25% for the year-to-date, while Rio Tinto [RIO] is up 6.59% for the month so far and 10.96% for the YTD. As a result, JP Morgan thinks BHP and Rio are likely to post the biggest dividends in corporate Europe this year, to go with blockbuster earnings.
Disinvestment from coal into mining the key materials needed for future technology could drive these stocks higher over the longer-term — copper, for example, is used in gadgets as varied as electric vehicles and fridges.
Whether this upside materialises depends on how long the supercycle can last and how quickly they can move away from fossil fuels.