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Thermal coal miners to seek private route for financing amid rising ESG tide

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Thermal coal miners to seek private route for financing amid rising ESG tide

Banking experts say thermal coal miners will gravitate toward the private capital market amid rising pressure on public investments, but there is no shortage of Asian banks willing to fund them despite their countries' carbon-neutral targets.

While thermal coal is "still very much needed," environmental, social and governance issues around the commodity will add strain for thermal coal companies seeking financing, EAS Advisors LLC Principal Edward Sugar said in Nov. 25 remarks to the Australia-hosted online International Mining and Resources Conference, or IMARC.

Sugar, whose New York firm has participated in over US$6.5 billion in transactions since he founded it in 2008, said thermal coal companies' stocks will not reflect earnings potential going forward.

"The companies looking to build out coal production are going to find it harder to do that in the public market, and will move towards private capital in the future," said Sugar, who discussed "a U.S. investor's view of global mining and resources opportunities" at IMARC.

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An increasing focus on environmental, social and governance issues around thermal coal could lead companies toward private financing.
Source: S&P Global Market Intelligence

Increasing pressure

Barclays Bank PLC (Australia) Managing Director and co-Head Paul Early said banks and shareholders are being pressured by an ESG movement that has ramped up over the past year to the point where domestic Australian banks "won't touch" thermal coal.

Funding could be secured through financiers not linked with the Organisation for Economic Co-operation and Development, or OECD, but "all the internal compliance and sign-offs" may not make the endeavor worthwhile, Early told S&P Global Market Intelligence.

"Asian banks are a bit more flexible" about financing thermal coal projects, particularly Indonesian, Singaporean and some Japanese banks, "but even they're feeling pressure," Early said.

While private equity would consider the commodity, some of the larger groups are backed by U.S. endowment money that prevents them investing in thermal coal, he noted. As a result, thermal coal miners and project developers will therefore have to go unlisted, Early said.

"Their source of capital won't be through traditional share markets or banks, it will have to be through family offices or people more interested in just making a return rather than having any public scrutiny," he said.

Early said there is a prominent market theory that public companies disposing of thermal coal mines to private entities that are likely less interested in reducing emissions will exacerbate rather than reduce emissions. The theory was espoused by Glencore PLC CEO Ivan Glasenberg while discussing the company's nickel assets at the FT Commodities Mining Summit in October.

Early said he is personally a proponent for environmentally friendly initiatives and that the transition must be balanced.

Asian options

Netherlands-based nongovernmental organization BankTrack's climate campaigner Ernst-Jan Kuiper told Market Intelligence in an email interview that, while coal is "clearly in decline" in Europe and in the U.S. and OECD countries more generally, many banks from those regions still finance coal in non-OECD countries.

Chinese "mega banks" also finance both the domestic coal and foreign coal industries, while new coal power plants, mines and infrastructure are still being built in non-OECD countries such as Turkey, India, Vietnam and Bangladesh, Kuiper said.

Kuiper, whose group tracks banks' financing of business activities with a negative impact on people and the environment, said China's and Japan's recent pledges for carbon neutrality by 2060 and 2050, respectively, are "definitely a big step in the right direction and will have an effect on financing of coal projects."

"However, we should not confuse the carbon neutrality targets of a certain country with the business model of banks in that same country," Kuiper added.

Chinese banks are still financing coal mining and power plants all over the world, he said, but emissions generated by those projects will be counted in the country where the mine or power plant is located.

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