Teck Resources, Canada's largest diversified miner, has rejected an unsolicited acquisition proposal from Swiss commodity trader and mining company Glencore. The proposal would have created two units from the Glencore and Teck merger, a combined metals business and a combined coal business which would subsequently be demerged. However, Teck's board unanimously rejected the offer, citing the increase in geopolitical risk for its shareholders and exposure to more fossil fuel assets, namely Glencore's coal assets and oil trading business. Teck continues to uphold its commitment to environmental, social, and governance (ESG) standards, and such an acquisition would undermine its appeal to investors. The company's controlling family shareholder, Canada's Keevil family, was also not interested in exploring such a transaction at this time.
Teck had earlier announced its decision to spin off its coal business into a separate unit named Elk Valley Resources (EVR), which could help the company focus on its copper and zinc operations. Teck believes they are likely to see a share price premium after spinning out EVR, as the resulting metals business will no longer be associated with coal which many financial institutions are unable to invest in due to ESG standards.
However, the EVR spinoff has created some controversy since over 90% of its cash flows would be dedicated to Teck for the next 8 years (details linked here). This ESG "greenwashing" is apparent to everyone, and many financial institutions may not buy into the notion that this spinoff is a real divorce from coal. It’s important to note that Teck likely developed the transition terms of the EVR spinoff in this way because it needs the coal cash flows to continue developing its copper business, which will require at least $4 billion in CAPEX in the coming years.
Now that Glencore has proposed a merger of the two mining companies, some shareholders may vote against the EVR spinoff, indicating they are more interested in this merger. Glencore is a major player in the coal and metals industry, and a merger could give Teck shareholders access to more assets and potentially stronger growth prospects. Moreover, a merger provides Teck shareholders the opportunity for a clean break with coal, and the ESG premiums are sure to lift multiples of the MetalCo thereafter. A merger also solves the problem of needing the coal cash flows for copper development since the combined MetalCo would then have Glencore's metal operations to help fund the substantial copper development CAPEX.
The vote on the spinoff will be an important event for Teck Resources and its shareholders, signaling the direction that the company will take in the coming years and potentially having significant implications for the company's growth prospects and shareholder value. Teck’s stock price responded very favorably (+19%) to the announcement despite the boards rejection, suggesting the market believes a deal will likely get done at the end of the day. Moreover, Glencore was only down about 2% on the day, which suggests the market realizes this is a good deal for everyone involved.
If a merger were to occur, the demerger of the coal and metals split would create a real diversified coal company definitely worth investing in, as opposed to EVR, which would be more of a call option on 2030 met coal prices, given the transition capital structure. A Glencore and Teck merger would help to consolidate the coal industry, which could only be good for metallurgical coal prices long term. If we consider how well Glencore currently manages Newcastle seaborne coal prices and also consider how BHP has been coming around to managing supply in such a way to keep coking coal prices elevated, the potential for a met coal duopoly consisting of BHP and CoalCo would be a very positive development for the sector.
The bottom line is that this deal makes a lot of sense for all stakeholders involved and once Glencore sweetens the bid, perhaps to 30% premium, its likely that shareholders will push the Keevil into doing a deal.
Thanks for the write-up CT. Hoping for the merger to go through and being able to invest in CoalCo at a later stage.
Good analysis, thanks. I noticed that you don't have a position on TECK even though you think that a deal will go through. May I ask why?