Coal’s comeback is paying off for hedge funds

Hedge funds like Third Point, Makuria Investment Management, and Odey Asset Management have benefited from the coal renaissance as they turn to a fossil fuel that many investors have shunned in the fight against climate change.

Coal mining company shares have soared as the price of thermal coal more than tripled in less than two years, spurred by the energy crisis and the Russian invasion of Ukraine.

Though coal prices are off their recent high, the fuel’s resurgence — and the record profits miners are making — are deepening debate among investors about how to manage the fossil fuel. Coal is the largest single contributor to carbon dioxide emissions from the energy sector.

Many say that owning stockpiles of coal is undermining efforts to combat climate change, and some have phased out the commodity entirely. Others argue that the green energy transition will take decades and that coal is an essential fuel during the process.

“The transition to green energy will not happen overnight,” said Petra Dismorr, managing director of consulting firm NorthPeak Advisory. “This has created a divide for many allocators” in assessing which stocks they can or cannot buy, she added.

Daniel Loebs Third Point and Odey Asset Management are among a number of funds that have chosen London-listed Glencore, the world’s most profitable coal company, to capitalize on demand for the fuel. Glencore shares are up more than 40 percent since the beginning of last year and are trading near a record high.

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Loeb told investors late last year that Glencore’s coal operations “put it on many people’s ‘don’t buy’ list, but this business is generating significant cash flow in the face of the global energy crisis right now – and sizeable is probably an understatement.” , according to documents seen by the Financial Times.

Glencore isn’t the only miner emerging as a winner. Profits for the world’s 20 largest coal miners tripled to more than $97 billion last year, with Glencore earning $13.2 billion and China Shenhua earning $12.2 billion in the 12 months ended June 2022.

Stocks that have outperformed since the beginning of last year include Whitehaven Coal, up about 200 percent, and Peabody Energy, up more than 150 percent. The MSCI World Index fell 14 percent over the same period.

Also benefiting from Glencore is James Hanbury, fund manager at Odey, whose Brook Absolute Return Focus fund is up 22.8 percent over the past year, with 3.4 percentage points of that gain coming from Glencore alone, according to investor filings.

“Its earnings have been hugely supported by the price of coal,” Hanbury wrote in an investor letter presented to the FT this month, adding that the company’s strong cash flows are attractive. Glencore was the seventh-largest holding in its fund earlier this month. Odey declined to comment.

Third Point told investors it expects Glencore to generate a “windfall” of 40 percent of the company’s market cap from its thermal coal business by 2024 — which would equate to about $30 billion in cash. Third Point declined to comment.

The coal industry defied predictions of its imminent demise even before the Ukraine war as the challenge of making a rapid transition to clean energy has become increasingly apparent.

Despite agreements at the UN climate summits to “exit” coal, consumption rose by 1.2 percent last year to a new record high, according to the IEA.

Coal is still used to generate more than a third of the world’s electricity and is the main energy source in fast-growing economies such as India, China and Indonesia. Even in Europe, which aims to cut emissions by 55 percent by 2030, coal has made a comeback due to Russian gas supply shortages.

For example, Germany, whose coalition government includes the Greens, has extended the lifespan of its coal-fired power plants to avoid a possible energy crisis. In December, Britain gave the go-ahead for the first new coal mine in 30 years.

Many campaign groups have called on investors to phase out coal entirely. “The days of coal are long gone,” said Charlie Kronick, Greenpeace UK’s climate finance adviser. “These dinosaur financiers need to invest in 21st-century technology, not bet on prolonging the coal age.”

Those investors who are putting money into coal also claim that it will be needed for years to come due to a lack of storage capacity for energy from renewable sources.

Mans Larsson, founder of London-based hedge fund Makuria, says investors trying to force big companies to sell their coal assets risk putting those mines in the hands of less environmentally conscious owners who are more difficult to hold accountable.

“The world does not have enough renewable energy and the energy transition will take much longer [than people think]. It’s not practical to be carbon neutral today unless we all radically change our lifestyles,” said Larsson, who says coal plants are “almost completely underinvested.”

“It’s almost immoral not to invest in coal because of the dependency [by so many countries] on fossil fuels,” he said.

Buoyed by bets on coal stocks, Makuria rose 43.5 percent last year while the S&P 500 fell 19 percent. The fund holds positions in Glencore, Whitehaven Coal and Teck Resources, a producer of copper, zinc and metallurgical coal.

While some investors have dumped fossil fuels entirely, others remain invested but say they are actively involved with mining groups in their plans for the companies, including possible exits.

“In any Paris-consistent scenario, the prospects for thermal coal are extremely difficult,” said Nick Stansbury of UK-based Legal & General, which owns about 1.5 percent of Glencore. “That is undeniable.”

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Legal & General is driving the company on its coal strategy and was a sponsor of a shareholder resolution calling for more disclosure of the group’s plans to be voted on at Glencore’s forthcoming annual general meeting.

At Glencore’s last general meeting, 24 percent of shareholders voted against Glencore’s climate strategy, triggering a consultation process the results of which will be published this spring.

The company plans to reduce its direct and indirect emissions by 15 percent by 2026 and 50 percent by 2035 compared to 2019. Glencore will limit coal production to 150 million tonnes a year, up from about 110 million tonnes this year, and has announced plans to close 12 of its coal mines by 2035.

As the dispute between investors over the future of coal intensifies, some hedge funds are reducing their exposure. In Europe, the prices for thermal coal have fallen by 26 percent since the beginning of the year after the winter in Europe has been milder than expected so far.

That could signal that the best of coal trading is over, at least for now, according to Barry Norris, chief investment officer at Argonaut Capital.

London-based Argonaut has reaped big gains on a stake in Glencore over the past two years, but recently hedged it with a short position – a bet that a security’s price will fall – in coal miner Thungela Resources.

“It has become a seasonal trade. Coal is very biased toward natural gas, which is very biased toward the weather,” Norris said. “We avoided an energy crisis [in Europe] this year, but next year we might not be so lucky,” he added.

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