Deutsche Bank has described Glencore’s Elk Valley Resources (EVR) as a cash cow, assigning a buy tag to the group whose share price has underwhelmed over the past year.
Glencore hosted a visit to its steelmaking coal operations in British Columbia, including the Neptune port near Vancouver, a few weeks ago.
Deutsche Bank, Barclays and Bank of America dispatched their analysts to the EVR site, of which Glencore purchased 77% a year ago from Canada’s Teck Resources for nearly $7bn (R125bn).
The trip included visits to the largest two of EVR’s four mines, the Neptune Bulk Terminals and presentations from members of the senior management and marketing teams.
“In sum, coal is Glencore’s strongest division operationally. EVR materially upgrades the asset quality of the group and management has made impressive progress in integrating the business and reducing costs,” Deutsche Bank analysts said in a note on the visit.
“Coal market conditions remain tough with the risk of further price weakness in the third quarter, but prices are close to a cyclical trough, in our view, and the division should remain a cash cow for the group moving forward.”
A year ago more than 90% of Glencore’s shareholders rejected the company’s plans to unbundle its coal and carbon steel business, essentially telling it to use windfalls from coal to fund its transition plans and return excess cash to shareholders.
Glencore outlined plans in 2023 to spin off its coal business.
The overwhelming view of shareholders was retaining the coal business would “enhance Glencore’s cash generating capacity to fund opportunities” for the transition metals portfolio, such as its copper growth pipeline, as well as “accelerate and optimise the return of excess cash flows to shareholders”.
Barclays noted Glencore’s management estimates 25%-30% of metallurgical coal market, or 80-million tonnes, is now cash flow negative including royalties and sustaining capex.
“This compares to the current surplus of 20-million tonnes, implying we should see some supply being curtailed in response to lower prices,” Barclays analysts said in a note.
“Our site visit confirmed EVR as world-class assets in terms of mine life (three key assets have reserves to 2060s), coal quality, cost curve position and ebitda margin.”
The British multinational bank said there was more work to do to optimise autonomous haul trucks at the Elkview coal mine.
The Elkview operation has had fully autonomous haul truck operations at all three pits since the beginning of last year.
“While this has delivered significant improvement in safety performance and better truck operating hours versus conventional haul trucks, overall productivity is still below what is achievable using conventional haul trucks,” it said.
Bank of America said along with BHP’s Australian metallurgical coal business, EVR is the other key tier 1 supplier of high-quality seaborne coking coal, with a market share of about 8%.
“Reserves are just over 800-million tonnes (100% basis), underwriting about 30 years of production with additional resources that might support further decades of production,” Bank of America said of EVR.
“For Glencore, EVR is the most recent in a long line of successful investments in coal. The group has been shifting focus away from energy and toward steelmaking coal, with contribution of energy coal to ebitda expected at 45% in 2025, compared to peak of 92% in 2022.”
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