Teck separation increasingly in question

Teck Resources‘ (TSX: TECK.A/TECK.B; NYSE: TECK) board has unanimously rejected the latest cash-sweetened bid Glencore (LSE: GLEN) lodged on Tuesday, resolving instead to hasten its exit from the coal business.

Glencore on Tuesday added a US$8.2-billion cash component to its original US$23-billion offer for Canada’s largest diversified miner, giving shareholders the option to receive cash instead of exposure to the companies’ combined coal portfolio, plus a 24% of the combined metals-focused business.

In a statement, Teck said Thursday it undertook a detailed review of the unsolicited offer and found it not in shareholders’ best interest. It suggests instead that Teck’s planned spinout of its coal business creates “a greater spectrum of value-enhancing opportunities” for both the future base metals-focused Teck Metals and Elk Valley Resources (EVR) entities.

“Glencore has made two opportunistic and unrealistic proposals that would transfer significant value to Glencore at the expense of Teck shareholders,” Teck’s chair, Sheila Murray, said in a statement.

Canaccord Genuity isn’t surprised by Teck’s rejection of the offer, suggesting the upcoming shareholder vote could be at risk. Mining analyst Dalton Baretto believes that Teck remains committed to its proposed separation plan at all costs and that the latest offer does not reflect Glencore’s ‘best and final offer.’

In a separate news release, Teck said Thursday it is shrinking the minimum royalty payable period for EVR to 3 years from 5.5 years following extensive engagement with shareholders.

On the surface, the offer to shrink the minimum royalty period is favourable, says Baretto, but his estimates indicate that it will take an average coking coal price of US$300 per tonne over the next three years to meet this goal, which he thinks is unlikely.

In addition, Baretto’s conversations indicate that the Class B shareholders would instead realize full value for the coal business immediately.

Teck CEO Jonathan Price argues that Glencore recognizes that post-separation, it would be exposed to significantly greater competition from other parties, which is why it is trying to frustrate Teck’s separation process.

“The fundamental flaws of Glencore’s revised proposal continue to make it a non-starter. It does not address major inherent risks, including substantial regulatory hurdles, jurisdictional and ESG concerns, and diluting the base metals business with significant oil trading,” he said.

‘Not the time’

Teck’s biggest shareholder, Norman Keevil, also made himself heard this week, saying the pre-separation period was not the time to explore a transaction of this nature.

Earlier this week, Keevil told The Globe and Mail that the big Swiss miner could hike its price all it wants, but he will not play ball. “Canada is not for sale,” he told the title.

Keevil already has the support of key stakeholders, including gold magnate Pierre Lassonde, who is planning to buy a stake in Teck’s spinoff coal company to protect it from a foreign takeover.

Egerton Capital UK, the seventh-largest holder of Teck’s class B shares, has said it will back Teck’s restructuring plans.

Meanwhile, proxy advisory firm Institutional Investor Services has recommended that shareholders vote against the proposed separation plan.

“With ISS recommending against the Teck proposal and a potentially higher bid from Glencore possible ahead of the Apr. 26 vote, Teck’s proposed separation is significantly at risk,” Baretto said in a note to clients.

He added that under the separation proposal, the proposal to sunset the Class A shares over six years is a separate vote (and is likely to go through), and he could see a scenario on Apr. 27 wherein Teck will continue under its current structure but with a clock ticking on the Class A shares.

At that point, Baretto believes the Class A shareholders could possibly be more receptive to a Glencore offer, as the pool of likely buyers for the combined company is likely small. That said, the analyst would not underestimate Dr. Keevil’s desire to keep Teck in Canadian hands for as long as possible.

Experts had anticipated that Teck’s decision to split the business in two would make it a takeover target. The company owns four copper mines in South America and Canada, which produced 270,000 tonnes combined last year.

Teck also expects to double copper output after the second phase of its Quebrada Blanca (QB) project in Chile ramps up to full capacity by the end of 2023.

Glencore believes that operating Quebrada Blanca jointly with the nearby Collahuasi mine, where the Swiss multinational holds a 44% stake, would add at least a US$1 billion of value to its coffers.

Top miners are hungry for copper assets as demand for the metal accelerates and a global shortfall looms. BHP, Rio Tinto and Glencore have disclosed that they actively want to grow their copper exposure.

For Glencore, acquiring Teck would be its biggest acquisition since buying Xstrata in 2012, and it would “unlock approximately US$4.25 billion — US$5.25 billion of post-tax synergy value,” according to the company.