Citigroup Inc. has been sounding out investors for a new coal-mining vehicle that it says could help limit the unintended consequences from large producers moving to exit the business.
The world’s biggest mining companies are under pressure from investors to stop producing thermal coal, the most polluting fuel, but face a conundrum over what to do with their assets. The mines will still keep producing under new owners, limiting any real benefit to the environment, and there’s a risk that whoever buys them may face less environmental and social scrutiny than the large, listed resource companies.
Citi has been meeting large institutional investors in London to pitch the idea, called “Coal to Zero,” according to people familiar with the situation and documents seen by Bloomberg News. Trafigura Group, one of the world’s biggest commodity traders, and Resource Capital Funds, are backing the venture. The concept is still in the early stages, the people said.
According to the documents seen by Bloomberg, Coal to Zero plans to buy up the best mines in safe mining jurisdictions. It will run them for profit, but commit to closing the operations before 2045. The pitch document says the vehicle will not look to grow or extend production from the mines. In return, investors will get annual dividends representing almost all the company’s profit. A percentage will be allocated to a fund to benefit local communities.
For climate scientists, operating coal on this time line is still far too long as the fuel should be taken out of the energy mix much sooner to reach climate targets.
Citi has has been vocal about its efforts to mitigate the effects of climate change and recently touted its withdrawal from financing coal mining. The bank said last year that it would stop providing financial services to thermal coal-mining companies over the next 10 years and plans to eliminate its credit exposure entirely by 2030.
“Citi is discussing an investment vehicle with a group of sponsors that will facilitate an orderly transition in the coal mining sector,” the bank said in a statement. Coal to Zero “aims to deploy private capital to support an orderly exit from coal in a way that is fair to the people and communities impacted. In doing so, it intends to generate a positive, measurable environmental and social impact alongside a financial return for investors.”
A Trafigura spokesperson in Geneva declined to comment. Resource Capital Funds, a mining-focused private equity fund, didn’t immediately respond to an emailed request for comment.
In the pitch document, Coal to Zero says it will be an “energy transition vehicle focused on global decarbonization by acquiring, responsibly operating and retiring coal assets significantly before the end of their mineable life.” The company says it will have a measurable environmental and social impact and is seeking interest from “ESG thought leaders.”
At least some of the investors pitched to by Citi are skeptical about the idea, according to people familiar with the matter. While the pitch is based on a more ESG-friendly approach to coal mining, backers would continue to profit from the assets in a similar way to the miners being forced to sell them in the first place, they said.
Thermal coal has become a major headache for the world’s biggest mining companies as investor pressure grows. For years, companies such as Anglo American Plc and BHP Group have argued they are the best placed to manage the industry’s decline.
But after growing push-back from investors, Anglo and BHP are in the process of selling or spinning off their remaining thermal coal mines, meaning some of the best mines in Australia and Colombia are for sale, with few willing buyers available.
–With assistance from David Stringer and Andy Hoffman.
© 2021 Bloomberg L.P.