Goldman to Shut Uranium Trading Unit, May Shed Coal Mines
The Goldman Sachs Group, Inc. (GS) is set to close down its uranium-trading unit over the next several years as it failed to receive an acceptable bid for the business when it put it up for sale this year, per a Senate report released on Wednesday. Also, the company may sell its coal mines in Colombia.
The report stated that Goldman has ceased building its physical uranium inventory and expects its physical and financial uranium positions to gradually decline over the next few years. However, the company will complete an existing uranium supply contract that continues till 2018.
The investigations report titled “Wall Street Bank Involvement with Physical Commodities” by the Senate Permanent Subcommittee also included Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM), apart from Goldman.
Goldman’s Uranium Business Position
The Wall Street banking giant began physical and financial trading of uranium in 2009 with the acquisition of U. K. based Nufcor International Ltd, a leading company in the uranium industry. The report mentioned that following the acquisition, Goldman expanded its uranium trading tenfold, from an annualized amount of around £1.3 million to almost £13 million in 2013.
Goldman also expanded its business with purchase of “millions of pounds” of uranium, controlled inventories of physical uranium at storage facilities in the U.S. and Europe, and grew as a long-term supplier of physical uranium from two utilities at the time of the Nufcor acquisition to nine utilities with nuclear power plants. Further, the value of Goldman’s physical uranium inventory soared from an estimated $90 million in 2008 to over $240 million in 2013.
The Concerns
The Subcommittee highlighted several issues regarding Goldman’s uranium-related activities. These include inadequate capital and insurance to cover losses in case a catastrophic situation arises, unfair competition, conflicts of interest stemming from controlling uranium supplies while at the same time trading uranium financial instruments, and lack of proper safeguards. In case of a probable catastrophic situation, the Subcommittee stated that risk arises during the release of uranium from a storage facility, which could result in a financial wreck to the financial holding company. This will ultimately lead to the involvement of the Federal Reserve and taxpayers paying the maximum price.
What Might Have Led to the Move?
The report mentioned that on being asked the reason for the exit from the business a spokesperson from Goldman stated that the physical uranium business was “easy to misunderstand.” Other possible reasons include lower uranium prices since the Fukushima Daiichi nuclear disaster in Japan in 2011, which resulted in weak demand for the metal, and tighter scrutiny from the Federal Reserve over the associated risks in the physical commodity business.
However, Goldman strongly disagrees regarding the significant risks of added liability for the financial holding company stemming from its physical uranium activities. The company claims that most of its commodities do not pose any risk to the environment.
Contemplating Coal Mines Sale
For many years, Goldman has been engaged in trading coal futures and other financial products tied with coal. Also, the company arranged for the shipping and storage facilities of coal for its clients who were coal producers, coal traders and coal-fired power plants. Goldman further expanded its physical coal activities by acquiring two coal mines in Colombia in 2010 and 2012.
The report revealed that Goldman is “considering selling” its Colombian coal mines as well. The company is facing operational and environmental challenges along with volatile coal prices and labor dispute. Further, owing to ongoing regulatory issues, since Jan 2014, Goldman’s subsidiary Colombian National Resources did not export any coal produced in Colombia.
In Conclusion
Amid heightened regulatory and political scrutiny on banks’ ownership of the physical commodity business, a number of banks have started exiting their physical commodity activities. In the past couple of years, Goldman has tried to offload some of its assets commodity business. Further, a few months back, Goldman initiated the sale process of its Detroit-based metals warehouse unit – Metro International Trade Services LLC.
Though with the latest moves, the company seems to trim down some assets in commodity business, the company has no plans to exit from such business. The report stated that Goldman intends to remain focused on commodities as a “core business” and will continue with its physical commodity activities.
Currently Goldman carries a Zacks Rank #2 (Buy). Piper Jaffray Companies (PJC) is a better-ranked company in the finance space with a Zacks Rank #1 (Strong Buy).
Read the Full Research Report on JPM
Read the Full Research Report on MS
Read the Full Research Report on GS
Read the Full Research Report on PJC
Zacks Investment Research
