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Anglo spinoff points to darker future for coal

3 minute read

LONDON, June 7 (Reuters Breakingviews) - Anglo American (AAL.L) has shown how much shareholders hate coal. Thungela Resources (TGAJ.J), the London-listed mining giant’s main producer of the black stuff, started life as a separate listed company on Monday with a market value of $250 million, just a third of the EBITDA it is likely to earn this year. That’s the investor equivalent of an extremely long barge pole.

Despite its reputation as the most carbon-intensive source of energy – and thus the worst climate polluter – there are pointers to coal having a long future. Wood Mackenzie analysts reckon it will still account for 31% of global power generation in 2030, mainly due to South Asian economies being slow to switch to green energy. And with minimal investment in new mines, there’s even an argument that supply will shrink faster than demand, pushing prices up.

For companies like Thungela and larger rival Glencore (GLEN.L), that means a decade or more of money to be made. Liberum analysts reckon Thungela might earn around $750 million in EBITDA in 2021. That’s three times more than the debt-free company’s current value. Either investors don’t believe they will reap the benefit of those cash flows, or the reputational cost of accepting such tainted lucre outweighs the financial benefits.

In Thungela’s case, it’s probably a bit of both. Many of the Anglo shareholders who received Thungela stock are under pressure to use their financial clout to speed the shift from carbon. Shares denominated in the volatile South African rand and the mining industry’s awkward fit in the post-apartheid country offer additional incentives to sell.

The company’s financial future, meanwhile, depends not just on demand for coal but also the cost of closing mines for good. The Boatman Capital, a research firm, reckons Thungela may face a $1.4 billion bill. That’s nearly three times Anglo’s own estimate of expenses like long-term waste-water treatment.

Anglo denies under-provisioning for these costs, and Boatman’s estimates are based on tougher South African mine-closure rules that are currently in draft form, which may be watered down. Yet in South Africa, as elsewhere, the political direction of travel is against coal. That points to more onerous regulation. Investors’ barge-pole approach has financial as well as environmental logic.

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A bulldozer fills a truck with coal near Newcastle, Australia, February 20, 2008. REUTERS/Mick Tsikas

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CONTEXT NEWS

- Anglo American on June 7 completed the demerger of its South African thermal coal operations when Thungela Resources started trading in Johannesburg and London.

- Thungela shares were trading at 23.92 rand by 0830 GMT, valuing the company at $242 million.

- The Boatman Capital published a report on June 6 saying Thungela’s equity was worthless due to $1.4 billion of potential liabilities for eventually closing its mines, nearly three times the cost forecast by Anglo American. Anglo American denied under-provisioning.

- Anglo American shares were down 2.7% at 31.68 pounds by 0920 GMT on June 7.

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