Thursday, September 8th, 2022
After gradually reducing the flow of natural gas to Europe over the past six months, last Friday, Russian President Vladimir Putin completely shut down the Nord Stream 1 pipeline that previously supplied Europe with approximately 40% of its natural gas energy needs. The continents ongoing efforts to replace the lost natural gas have now reached crisis proportions.
Due to a confluence of fortuitous events, mining giant Glencore PLC (GLNCY), the worlds top coal exporter, now finds itself in the enviable position of capitalizing on Western Europes immediate need for coal to fire many of its previously shuttered power plants.
How dire is the European energy crisis? According to a recent Wall Street Journal report, customs data collected by Trade Data Monitor reveals that Germanys coal imports from Australia were up 21% from March through May 2022, compared with the same period in 2021.
It would have been unthinkable two years ago for climate change-conscious Europe to reactivate long-dormant thermal-coal fired power plants. That scenario is now a reality. Great Britain has implemented plans to reopen some of its idle coal-based plants. Germany, too, has taken steps to resuscitate some of its coal-based power stations.
Glencore has resisted persistent pressure from activist investors to divest its coal business. Instead, it has adhered to its business strategy of depleting its coal mines until supplies are exhausted by 2050. It is poised auspiciously now to profit from the geopolitical instability in Europe borne out of the Russia-Ukraine conflict that shows no signs of easing.
Glencore recently posted its six-month earnings for 2022, and the increase in profits from its energy division reflects how serious the energy crisis in Europe has become. At the beginning of 2022, the price of coal was approximately $134 per metric ton; it currently is selling for upwards of $400 per metric ton.
The chart below shows the astonishing rise in revenue for Glencore on a year-over-year basis:
Glencore reported a huge leap in Ebitda for the first six months of 2022. Ebitda for this period reached $18.92 billion, an increase of $8.65 billion from the same period last year. The company logged a net profit of $12.09 billion, a $10.81 billion increase from its $1.28 billion net profit for the comparable period last year.
The company is committed to returning this excess windfall cash in the amount of $4.5 billion to shareholders in the form of a special dividend as well as share buybacks; $1.45 billion is slated for a $0.11 per share dividend increase, and the remaining balance of $3 billion will be allocated for $0.23 per share in buybacks.
Although the companys decision to maintain its coal mining operations appears now to be prescient, the question arises: how long will the good times last? No one can say for certain when the Ukraine conflict will end. One issue, however, has been resolved. There has now developed a consensus among European nations that Russia will never again be viewed as a reliable energy partner.
This new strategic energy reality ensures that Europes appetite for a source of carbon-based energy that was once considered anathema will continue for the foreseeable future. Renewable sources of energy simply have not been built out enough to be sufficient to replace the continents lost natural gas supply from Russia. According to UBS mining analyst Daniel Major, coal prices will likely remain strong for the next six to nine months and historically high after that for another two to three years.,
Europe is scrambling to replace the lost Russian supply with other sources of natural gas, primarily Liquified Natural Gas (LNG). Germany is in the process of constructing a floating terminal to handle LNG exports on a temporary limited basis, yet at present, the continent has no permanent land-based terminal capable of handling large volume of LNG exports from the U.S. and other countries.
In short, for many European countries, coal has become the go-to source to meet its emergency energy needs, and Glencore shareholders will continue to benefit handsomely in the near to intermediate term until the supply-demand imbalance achieves equilibrium. I believe there is a lucrative opportunity here for potential short-term gains.