I’ve been busy this week. I have already dealt with Open Orphan, one of my portfolio holdings, and its plans for a demerger. Today I am dealing with another. Anglo American (LSE:AAL) wants shareholder approval to spin-off its thermal coal operations in South Africa into a new holding company, Thungela Resources. If shareholders, like me, back the move, they will get one Thungela share for every 10 Anglo shares they own. At least 75% of shareholders need to approve the demerger at the annual general meeting on 5 May 2021.
I suspect the motion will be passed. The 3% rise in the Anglo American share price after the announcement suggests investors in Anglo approve of the move.
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I will not be voting for the demerger, even though I suspect I will be on the losing side. I don’t want to own companies that are not moving towards a fossil fuel-free future. But, if the demerger is approved, I will end up holding shares in Thungela, a pure-play coal miner. What’s going to happen to the price of those shares when they start trading? I can’t see any mention of any lock-up period or restrictions, so I guess many investors are going to run for the exit immediately.
If I rush for the exit, I am fairly confident I will be selling Thungela at a loss. I could wait and hope that a strategic buyer comes in to snap up Thungela at a heavily discounted price. But I don’t really want to do that. Now, I could be wrong about Thungela’s prospects. Other investors might want direct exposure to thermal coal as Anglo has suggested. But looking at the operating loss the thermal coal business made in 2020 and the climate change emergency the world is facing, I am not confident. Anglo could have made plans to dispose of Thungela by a split-off or a carve-out if they are as confident about investor interest in an independent coal company as they say.
Anglo American share price
As for the impact on the Anglo share price, I think an approved demerger will be positive. Being out of thermal coal will allow previously reluctant investors to buy in. Anglo will continue to mine copper, platinum group metals, nickel, manganese, iron, and diamonds. Some of these metals are critical to the green economy. All should see increased demand as the world gets back to normal after the pandemic.
Mining is a cyclical industry. The outlook for metal prices looks positive now, but things will turn eventually. I am prepared to hold my Anglo shares through the cycles. According to the World Steel Association, the company will still produce coking coal for steel making, which produced 8% of global CO2 emissions. Also, there is the Woodsmith mine, which Anglo acquired in the Sirius Minerals takeover. It has the potential to produce quality fertiliser to help the world grow food. But, production won’t start until at least 2024. Until production starts, the project will continue to gobble up capital.
Would I buy Anglo Shares?
I won’t sell my Anglo shares, but I also won’t buy more right now. If the demerger is approved then buying now would give me more Thungela shares to dispose of. I will consider buying shares in a thermal coal-free Anglo.