Glencore's recent acquisition of Teck Resources' steelmaking coal unit highlights the enduring profitability of inexpensive fossil fuels for companies, foreseeing potential profits for the next couple of decades, despite their gradual replacement by renewable energy sources.

While many Western companies show reluctance in exploring new coal sources or establishing fresh mines, investors emphasize coal's significant role in satisfying the escalating demand for cleaner energy globally. The persistent demand for coal, primarily driven by Asia, continues to drive prices upward.

Coking coal emerges as a prominent choice for companies, given its use in steel production—an integral component in extensive infrastructure and renewable projects. Even major entities like BHP, the world's largest miner, decided to retain its high-quality coking coal assets after a 2020 review, which led to divestment of some coal mines.

Glencore's acquisition of Teck's coking coal business is projected to establish a dominant coal entity generating an estimated $5 to $6 billion in annual free cash flow. Glencore, already among the world's leading listed thermal coal producers with an output of approximately 110 million tonnes annually, possesses its own coking coal assets.

Despite being one of the most environmentally polluting fossil fuels, the use of thermal coal for electricity production is gradually diminishing in the global shift toward cleaner energy sources. Glencore's CEO, Gary Nagle, reaffirms the company's intent to phase out thermal coal assets while anticipating sustained demand for both thermal and coking coal in the foreseeable future.

Investors in mining agree that inexpensive carbon energy such as coal or natural gas contributes to building economically viable renewable energy sources. They foresee a profitable capital return narrative for companies focusing on safe and productive coal production, leading to cash harvesting and rewarding shareholders.

Although Western financial institutions pledge to curtail lending and insurance coverage for coal-related sectors due to climate change concerns, the expansion of coal mines seems improbable. Yet, the International Energy Agency (IEA) notes a record global demand for coal in 2022, predominantly from China.

The prices of coking coal surged above $300 per tonne this year due to limited supply and optimism surrounding the global economy's avoidance of a severe recession. Meanwhile, thermal coal prices, after peaking above $400 last year during the Ukrainian conflict, currently stand around $120 per tonne.

Investors suggest that Asia's reliance on coal will persist, ensuring continued profitability from these assets even after their spin-off. Glencore intends to divest combined coking coal and thermal coal assets within two years post-deal closure and eventually list them in New York, with secondary listings in Toronto and Johannesburg.

Peter Letko, co-founder of investment firm Letko Brosseau, considers Teck's steelmaking business as a prized asset, acknowledging its profitability and unique nature within the coking coal sector.