Will Teck cave to Glencore? What’s next in the saga

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Swiss mining giant Glencore PLC said its US$23.2 billion offer to take over Teck Resources Ltd. still stands, adding to the pressure on the Canadian miner to make good on a promise to rework a plan that would split Teck into separate coal and copper operations.

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In a statement on April 27, Glencore reiterated a threat to take its takeover proposal directly to shareholders, bypassing the board of directors, which so far has spurned two approaches from Glencore.

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“Glencore hopes that the Teck board will, against the backdrop of the feedback provided by its shareholders, engage constructively in order to fully explore our proposal which has not been done to date,” Glencore said.

The statement came a day after Teck’s management cancelled a shareholder vote on its previous separation plan. Chief executive Jonathan Price repeated on a conference call on April 26 that Glencore’s latest offer was a non-starter and that he intended to come up with a better plan to separate the company’s mining assets.

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Had shareholders supported Teck’s move to divide the company, Glencore would have stopped its pursuit. Teck’s decision to pull the vote increases the pressure on its management and gives the Swiss miner an advantage.

Here’s what you need to know about the next steps in the struggle for Teck and why it matters:

Teck sale a ‘low probability event’

Price said that while a majority of shareholders supported his plan, it became clear that he wasn’t going to get the two-thirds majority that was required to approve the proposal.

The CEO said repeatedly during the conference call that his goal was now to “pursue a simpler and more direct separation” based on the feedback that he got from shareholders. Price didn’t provide much detail on what the alternative course would be or how much time it would take, other than stating that Teck would be looking at a “full-suite of options” to find the best way to separate the company.

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In a way, this takes Teck back to square one. Price said that the board had discussed various options for two to three years before deciding to announce its original separation plan.

“We will relook at those options again to see if they meet the criteria of doing this in a simpler and more direct manner,” said Price. “We’ll also look though to see if there are other opportunities that weren’t considered previously.”

The one thing that’s clear from the above is that Teck is not going to entertain takeover bids, be it from Glencore or any other company until it finds a way to successfully divide the company.

As Canaccord Genuity Corp.’s Dalton Baretto said in a statement to the Financial Post: “The board is fully focused on finding a structure that will deliver a clean split between the metals and coal businesses. I do not expect them to engage meaningfully in whatever bids may emerge until the path forward on the split becomes clearer.”

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Bank of Nova Scotia analyst Orest Wowkodaw echoed that sentiment in a note to clients on April 27, describing the likelihood of Teck selling its assets before a split to any company as a “low-probability event.”

Will Teck sell its coal assets?

With Teck heading back to the drawing board, analysts believe the miner could consider the sale of its coal mines or even participate in an M&A transaction. But there are challenges.

Baretto said there would be limited appetite for Teck’s coal business — essentially the second largest steelmaking coal business in the world — to a single entity.

“A sale in my opinion could involve some sort of a public-private type transaction where you float a piece of the business and then you put a syndicate of private entities together, steelmakers, private equity firms and so on will take the rest private,” he said.

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Wowkodaw agreed and said that an outright sale of the coal assets may not allow Teck to get a fair value.

The one aspect that Teck will want to address is the connection that its metals and coal companies would have despite the separation. Based on Teck’s original plan, the metals company would depend on cash flow from the coal unit for at least three years following separation. This is something that investors have frowned on because it doesn’t provide the clean break from fossil fuels that many seek.

As it stands, Teck depends on steelmaking coal for about 60 per cent of its revenue, though it has been trying to rebalance its portfolio to produce more metals.

The Canada question

The federal government has said that it’s watching Teck’s struggle with Glencore closely. Teck’s decision to pull the shareholder vote makes the bidding war more interesting for federal authorities.

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The government has the power to reject such a takeover from a foreign company on “net benefit” and national security grounds — and it’s done so before. In November, for example, Ottawa ordered three Chinese companies to divest their shares from three Canadian lithium miners due to the growing importance of critical minerals.

Glencore, though, already runs a number of mining projects in Canada and employs about 9,000 people.

Some officials have spoken out against the deal. British Columbia Premier David Eby said Glencore would struggle to meet his province’s high environmental and social standards.

Mayors of the towns of Sparwood and Elkford, which neighbour Teck’s steelmaking coal mines, said that a deal with Glencore would hurt the region’s image since it would connect Teck to Glencore’s thermal coal, which is used to generate electricity, but is a major contributor of carbon emissions that pollute the environment.

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Why Teck matters

Glencore’s surprise bid to buy Teck was announced on April 3, just days after the Canadian miner produced its first copper concentrate from its Quebrada Blanca 2 (QB2) project in Chile. The project is Teck’s largest in terms of construction and is expected to double the company’s copper production in the near future.

Copper is expected to play a key role in the shift away from fossil fuels, given it is essential for most electricity-related infrastructure, including electric vehicles and wind turbines, and to transfer electricity. Analysts say that most big mining companies have limited growth opportunities for the red metal, setting the stage for large-scale mergers.

Separating is complicated

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Teck announced its plan to separate its metals and coal businesses in February. The company said the move was aimed at unlocking more value for shareholders by creating a company that investors who want a clean break from fossil fuels could invest in.

Still, Teck Metals would have depended on cash flow from the coal unit for at least three years following the separation, keeping the coal and metals business intertwined and seemingly going against the proposal’s main selling point to investors.

A month after Teck’s announcement, Glencore entered the picture. The Swiss mining giant said that it wants to take over Teck and undergo its own separation. Glencore, which posted a revenue of about US$250 billion last year compared to Teck’s US$13 billion, produces an array of commodities including, gold, copper, cobalt, zinc, nickel, oil and coal.

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After merging with Teck, Glencore’s plan calls for creating two companies. One would control the combined metals portfolio, and could become the world’s third largest copper producer. The other would become a huge publicly traded company focused on coal. Glencore’s plan differs from Teck’s in that the two new companies would stand alone right from the start, not depending on the other for revenue.

Not all shareholders are equal

That’s because Teck has a dual share class structure, which means shareholders of both classes A and B would need to approve any potential deal. This makes it difficult for any company to take over the Canadian miner.

A major hurdle for Glencore lies in Teck’s chairman emeritus, Norman Keevil. The industry veteran, who is very popular in the mining community, controls a majority of Teck’s A shares, making his vote key to the company’s future.

In a statement on April 17, Keevil said that while he was open to mergers, acquisitions and even a possible sale of Teck after the separation, he didn’t support Glencore’s bid.

• Email: nkarim@postmedia.com | Twitter: naimonthefield