Insight: Bankers pour cold water on red hot coal

Bens Creek

24/11/2022 24:00

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      Coal miners struggling to fund expansion plans
    

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      Thermal coal costs more than coking coal after price surge
    

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      Most Western bankers pulling back from coal industry
    

  
    By Sarah McFarlane and Clara Denina
       LONDON, Nov 24 (Reuters) - It's the best of times, it's
the worst of times. At least when it comes to mining coal.
    After years of decline, demand for the polluting fossil fuel
has surged this year as Europe scrambles to replace Russian gas,
and coal miners are making money hand over fist.
    With coal prices hitting record highs, companies would
normally expand their operations, but projects are being left on
the table as most Western banks stand by climate pledges to
restrict lending to the sector, according to a dozen mining
company executives and investors.
    "If you are a business with a bank right now it's easier. If
you want to build a new mine, forget it, that has become
impossible," said Gerhard Ziems, chief financial officer at
Australian coal miner Coronado Global Resources Inc  CRN.AX .
    Demand for the fossil fuel is so strong some miners say they
are selling coking coal used by steelmakers to electricity
companies instead. The lower-value thermal coal used in power
plants traded above coking coal for the first time ever in June.
    "It's a crazy situation," said Coronado's Ziems, likening it
to silver trading at a higher price than gold.
    Benchmark Australian Newcastle thermal coal was languishing
at about $50 a tonne at the start of 2020 before climbing to
above $150 tonne at the start of 2022. It then surged to a
record high above $400 a tonne in September as countries
desperately sought alternatives to Russian gas.    
    But with Western banks under pressure from shareholders to
show action on climate change, coal executives say they are
having to scout for alternative funding to take advantage of the
favourable backdrop, via public markets, pre-sale finance,
trading houses, private equity firms and investment funds.
    CLOSED DOORS
    For some, it's even just a question of finding a lender for
basic financial services.
    Shortly after North American miner Bens Creek Group  BENB.L 
listed on London's AIM in October last year, Lloyds Banking
Group  LLOY.L  withdrew its banking services from the company
due to a change in policies regarding coal. 
    Lloyds said in February it would stop financing miners that
generate more than 5% of their revenue from thermal coal by the
end of this year, and would no longer provide general purpose
banking to new coking coal customers. 
    It took the managers of Bens Creek months, and dozens of
rejections, before they managed to open a bank account at the
State Bank of India's  SBI.NS  branch in Britain, chief
executive Adam Wilson told Reuters. 
    "Nobody had these issues five years ago," he said.
    Lloyds declined to comment on individual client
relationships. 
    It's a similar story for Minergy Limited  MIN.BT , a startup
listed in Botswana looking to fund its expansion plans.
    "We are exploring all the options at this stage, but
commercial banking is not necessarily available," said Minergy
Chief Executive Morne du Plessis.
    The company is now looking to reduce its debt and fund its
project to double annual mining capacity to about 3 million
tonnes by selling additional shares, as well as listing on the
London Stock Exchange next year.
    Du Plessis said Minergy had struggled to secure simple
banking services, such as overdrafts or loans to purchase
vehicles. "Because we are in coal, because we are a startup
business, they wouldn't even consider that," he said.
    CHINA EXCEPTION
    Despite the pressure on Western lenders, global investments
in coal supply are expected to rise by about 10% this year to
$116 billion, with China leading the way, the International
Energy Agency said. 
    Mainly thanks to China, coal investment this year is
expected to be in line with 2015, the year governments signed
the Paris climate accord which aims to keep global warming well
below 2 degrees Celsius compared with pre-industrial levels.
    Analysts say, however, that China consumes most of the coal
it mines, so increased production in the country is unlikely to
have much of an impact on the amount of coal traded on the
global market - or its current high price.
    With funding hard to come by from Western banks, coal miners
outside China have turned more to equity markets this year. 
    As of Nov. 11, they had raised $2.2 billion via public
markets, up from $1.3 billion in same period of of 2021 and the
highest for the period since 2017, Refinitiv data showed.
    But analysts said the fund raisings have not been enough to
offset the billions of dollars of Western bank lending that has
disappeared over the last couple of years.
    Environmental lobby group Reclaim Finance says 96 banks now
have policies to restrict financial services to the coal sector.
    The biggest Western lender to coal miners in 2020 was
Deutsche Bank  DBKGn.DE  with $538 million followed by Citi
 C.N  on $300 million. By 2021, that had dropped to $255 million
for Deutsche and $218 million for Citi, according to data
compiled by Reclaim Finance.
    "With regard to thermal coal mining, any transaction in coal
mining requires an enhanced environmental risk review," a
Deutsche spokesperson said, adding that the bank was updating
its coal policy. 
    Now, companies that depend on coal for more than 50% of
their revenue must show credible diversification plans to get
financing from Deutsche. Firms without such plans will be phased
out of the bank's portfolio by 2025, the spokesperson said.
    Citi declined to comment.
    A number of banks including ANZ  ANZ.AX , Bank of Montreal
 BMO.TO , Barclays  BARC.L , BNP Paribas  BNPP.PA , Commonwealth
Bank  CBA.AX , Santander  SAN.MC , Standard Chartered  STAN.L ,
RBC  RY.TO  and UniCredit  CRDI.MI  financed coal miners in 2020
but did not in 2021, the Reclaim Finance data showed. 
    ALL TALK  
    Minergy's du Plessis said since coal prices surged, there
have been more conversations over potential sources of cash,
from equity investors to debt refinancing proposals to trade
finance.
    "There is an openness to discuss this because coal is now a
buzzword, so the conversation is easier. Has anything
materialised? No it hasn't," he said.
    Bens Creek listed shares partly because of the lack of
appetite from banks to support any expansion of coal mining,
chief executive Wilson said. 
    The company is set to double production to about 1 million
tonnes next year, though Wilson does not expect current high
prices to boost coal output much globally, as the development of
new mines and the infrastructure they need such as railways is
unlikely given the uncertain long-term outlook for coal.    
    Some investors snapping up shares in coal company fund
raisings and listings agree that long-term plans are becoming a
thing of the past for miners, but they say the short-term
returns are attractive.
    "Historically, coal mining CEOs did not want to return cash
to shareholders, they used it to expand output or buy
competitors," said Jonathan Barrett, chief investment officer at
Luminus Management, which owns shares in U.S. coal miner Arch
Resources Inc  ARCH.N . 
    "But in the last year or two they have realised that the
best way for them to create value for shareholders is to return
the cash as opposed to expanding, because it's a much better and
lower risk use of capital," he said.
    Barrett and his business partner Robert Felice launched the
Iris TIME fund in October backed by wealthy families to focus on
unfashionable sectors with attractive cash flows, such as coal.
    Big dividends and share buyback programmes in the industry
mean that in some instances you could make back your entire
capital investment in about two years, Barrett said. 
    "Most of these guys are generating cash hand over fist and
they are trying to reduce their reliance on banks, because they
have seen how quickly banks are turning on the industry."
 (Reporting by Sarah McFarlane and Clara Denina; Editing by
Veronica Brown and David Clarke)
 ((sarah.mcfarlane@thomsonreuters.com;))