[Ferro-Alloys.com]Glencore: Accelerating The Turnaround With Accretive Cerrejon Acquisition

Summary

Glencore is acquiring BHP and Anglo American stakes in the Cerrejon thermal coal mine in Colombia.

While the deal does increase its coal exposure, the economics are compelling, and the company remains on track to hit its emissions goals.

Helped by the favorable backdrop and an improved balance sheet, shares look set to outperform.

Glencore (OTCPK:GLCNF) has announced the acquisition of BHP (BHP) and Anglo American's (OTCQX:AAUKF) separate 33% stakes in the Cerrejon thermal coal mine in Colombia for a total consideration of c. $588 million in cash. On balance, I see this as a mutually beneficial transaction for all the parties in the JV - it fulfills BHP and Anglo American's stated ESG objective to exit standalone thermal coal mines, while for Glencore, the deal offers good value. Even with the increased coal exposure, Glencore remains committed to close the mine by fiscal 2034 (instead of extending the mine life) while also staying on track to achieve its emissions goals. Backed by a vastly improved balance sheet and an attractive commodity backdrop, along with optionality post-CEO transition, Glencore appears positioned to outperform.

A Closer Look at the Cerrejon Acquisition

Glencore, BHP, and Anglo recently disclosed that Glencore has agreed to purchase Anglo's and BHP's respective stakes in the Cerrejon thermal coal mine in Colombia. As a result, Glencore will gain complete control of the asset, implying 100% ownership (each company currently owns 33.3%). For context, Cerrejon has c. 25Mt/year of capacity and is an integrated producer of high-quality thermal coal, although current mining rights are set to expire in 2034. The key advantage here is that it is a low-cost operation (cash cost of sub- $45/t) selling into the Americas and EU while also maintaining competitiveness in the Pacific despite freight costs.

Source: Company Data

The announcement will come as little surprise to most investors - BHP and Anglo have been vocal about their intention to exit their respective stakes in the past, and this deal allows them to do just that. Following the recent Thungela de-merger, this transaction also represents Anglo's complete exit from thermal coal, while BHP remains in an active disposal process for its remaining thermal coal assets in Australia. This stands in contrast with Glencore - the company has opted to take a different approach to thermal coal by committing to responsible stewardship and Paris-aligned emissions targets instead of fully exiting.

Transaction Terms Point Toward an Accretive Outcome

With the Cerrejon acquisition, which comes with a c. $588 million price tag for the remaining stakes, Glencore will fully own all of the cash flows/economics of the mine, along with control of the future strategy at Cerrejon. In turn, Anglo and BHP are recognizing impairments to the tune of $80-100 million each following the deal. As things stand, the transaction is expected to close in H1'22 subject to the Colombian government and other antitrust approvals.

At first glance, the economics of the deal looks attractive for Glencore. While the Cerrejon mine suffered operational disruptions last year due to strikes, which led to an EBITDA breakeven outcome in 2020, a return to normal, uninterrupted operations would yield significantly higher EBITDA generation. And as the acquisition adds 15-20Mt of incremental thermal coal capacity, this likely entails c. $350+ million of cash flow to be generated by the expected transaction close in mid-2022, further reducing the effective purchase cost. Relative to the c. $588 million consideration, this implies a payback period of fewer than two years or 1-2x EV/EBITDA at current spot coal prices. As such, the favorable transaction terms should drive a highly accretive outcome even before considering potential synergies.

Updated Emissions Goals Trending in the Right Direction

Despite having a larger thermal coal exposure post-acquisition, it is worth noting that Glencore is the only major miner fully committed to compliance with the goals of the Paris Agreement for Scope 1+2+3 emissions. In line with this target, Glencore also reaffirmed its commitment for a "responsible managed decline" with regard to its coal despite the Cerrejon acquisition (full excerpt from the press release below). Specifically, the updated targets now cover a 50% reduction in absolute total emissions (Scope 1+2+3) by 2035 (up from 40% previously), along with a new short-term reduction target of 15% by 2026 (relative to 2019 levels).

In a way, Glencore having full ownership of Cerrejon, a relatively short life mine with production set to decline materially from 2030, might be the ideal outcome from a climate perspective. Per management, the company plans to close the mine when the licenses expire (note the current mining concession expires by 2034), which compares favorably to other parties who would likely look to extend the licenses considering the size of the resource base. And in the meantime, Glencore also stands to benefit from the favorable pricing environment, making this a win-win.

Final Take

Overall, I view Glencore's latest acquisition and the expanded coal mining exposure as a net positive considering the clear financial and strategic merits. And while ongoing investigations by the DOJ and CFTC, along with prior operational disappointments, remain relevant overhangs, I think the increasingly robust balance sheet and favorable commodity backdrop provide more than enough offset. As such, I expect shares to outperform from here as visibility improves on the underlying turnaround. Furthermore, with Glencore's CEO transition complete, optionality around the strategy evolution, non-core asset disposals, and capital deployment present potential upside catalysts going forward.

• [Editor:tianyawei]