The world may need a bad bank for coal

Thermal coal's days are numbered: It's a major climate offender, alternatives are cheap and the world's biggest diggers want to rid themselves of the fuel. The greenest among them can afford to go one step further, grouping the grimiest mines and promising even eco-friendly investors shiny dividends alongside cutting-edge rehabilitation and an orderly retreat. It's a gamble that could well benefit investors as well as the planet.

Miners have been moving away from coal for some time. Rio Tinto Group was among the first off the blocks, selling its last mine in 2018. Under pressure from investors who want to cleanse their portfolios, other diversified players from Anglo American Plc to BHP Group are now scrambling to sell or spin off theirs. Even Glencore Plc, long the largest producer of seaborne thermal coal, plans to run down those assets by 2050, a shift the company says will get it to net zero emissions in time to hit Paris Agreement targets.

That's laudable, but not enough. Simply selling mines solves the problem for miners, but not the planet - and in any event there are now too few credible buyers, as BHP has found. Spinning them off as separate listed entities is unsatisfactory too, opening up the prospect of a plethora of new names, hardly the most efficient solution - and one unlikely to accelerate a coherent end to coal.

It's a missed opportunity for an industry that has lagged the greener end of the oil sector when it comes to cleaning up. This is the moment to send a stronger signal, to refocus management time and shareholder attention. More seriously, a routine solution treats thermal coal as if it were an isolated headache. In reality, it is just one of several exits the industry will need to navigate over time as pressure to reduce carbon intensifies, from metallurgical coal to, in BHP's case, oil and gas.

Even if squeezed supply is helping to support prices for now, the endgame is under way. Future capacity to generate electricity from coal is shrinking even in key emerging economies. Research outfit Global Energy Monitor estimates that Bangladesh, the Philippines, Vietnam and Indonesia have cut 62 gigawatts of planned coal power in 2020. India, it calculates in the same December report, now has around 30 GW of coal power planned for construction, compared to 238.2 GW back in 2015. China wants emissions to peak by 2030 and has signalled coal imports will shrink, as consumption is capped but its own output rises.

Deposing king coal

To be clear, planned spinoffs could well work individually. Anglo's Johannesburg listing plan is supported by domestic demand and the fact its largest shareholder is South Africa's Public Investment Corp. The assets' modest size relative to the rest of the business means that a green uplift in valuation for the parent is more than likely to offset any loss. If Glencore decides to carve out coal, that's a roughly 110 million metric ton a year operation today that could well suck up others and produce impressive yields.

It's just that a far greener and more climate-friendly outcome is possible, helping miners recast their credentials and experiment with structures that could well serve them and other carbon-intensive industries in future. There's even plenty for environmental, social and governance-minded shareholders in the large miners - and eyeing the new options - to support.

An ESG halo for any coal venture would require strict ground rules. Miners would need to pay generously into a sinking fund, of the kind that Tim Buckley at the Institute for Energy Economics and Financial Analysis laid out last year, to cover rehabilitation and even legal risk. A credible board set up from the start by the parents - who would retain reputational ties, if not ownership - and aligned performance indicators focused on conservative spending, limited or zero expansion and a commitment to progressive rehabilitation, including protection for workers, would also be necessary. Green guarantees, in short, alongside sparkling dividends.

When it comes to structure, a listed solution is appealing, for transparency. It's also challenging: the process would have to start with one miner, say BHP, spinning off coal assets and handing out shares to its investors, before absorbing Anglo's operations and eventually others. The value of the mines will go to zero, but payouts will be generous and any remaining cash in the sinking fund could be distributed.

Another option is to build mining's very own bad bank, to buy up unloved assets, benefit from economies of scale and work towards an orderly end. Private equity may not be willing to step up funds, while government support, provided for lenders cleaning up, will be harder to come by for resource companies doing the same. There's an argument, though, for multilaterals and others to step in with what could be seen as transition finance. Family offices and individual investors may even like the yield enough.

This is all conjecture, of course. And yes, any such move would most likely cover only a fraction of global production. Giant state-owned entities in China and India would remain outside, at least to start.

It's still an experiment that would signal green ambition in a sector that has lacked it for too long. (Bloomberg)