Gatecrashed: The $35b decision that could shake up the mining world

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Shareholders in Canada’s Teck Resources will meet on Thursday (AEST) to vote on a proposal to demerge the groups base metals and coal mining assets. If they vote the proposal down it could reshape the global mining sector.

Teck announced its plan to spin out its coal business from its copper and zinc operations in February. The metals business, renamed Teck Metals, would be a pure play on commodities that are critical to the transition to decarbonisation. The coal business, to be known as Elk Valley Resources, would be run for cash.

Glencore chief Gary Nagle’s proposal is focused on maximising cash generation while allowing mines to deplete.Credit: Bloomberg

The separation, however, wouldn’t be complete. For six years (subsequently reduced to three) Teck would receive royalties from the coal operations equivalent to about 90 per cent of that unit’s free cash flows.

Within weeks of the announcement of Teck’s plan, Glencore gatecrashed it.

It has emerged that former chief executive Ivan Glasenberg first engaged with Teck in 2020, promoting a plan to do what Teck is proposing but on a far more ambitious scale, with Glencore merging its metals businesses with Teck’s and spinning of their combined coal operations in a separate entity.

After Teck revealed its plans, Glasenberg’s successor, Gary Nagle revived that proposal with a $US23 billion ($35 billion) takeover offer which envisaged a Metals Co, headquartered in Canada, that combined both companies’ copper, zinc, nickel and cobalt assets along with Glencore’s metals trading operations and a giant new Coal Co listed in New York that would pursue the Glencore strategy of maximising cash generation while allowing the mines to deplete.

After the all-scrip initial offer was rejected, Glencore added a $US8.2 billion cash component, seeking to entice those Teck shareholders keen to end their exposure to coal to support its bid. That, too, was rejected.

While it appears there is some support for Glencore’s proposal from some larger Teck shareholders the stumbling block for its proposal is a majority of super-voting shares, which carry 100 votes each, held by Teck’s founding family. One of Canada’s mining industry patriarchs, Norman Keevil, speaks for 55 per cent of those “A-class” shares and has expressed opposition to the bid.

That hasn’t deterred Nagle, who has been lobbying Teck’s shareholders and urging them to make the vote on Teck’s proposal a referendum on its own proposal, which offers a quicker, cleaner and value-adding exit from coal.

Teck’s demerger requires the support of two thirds of the shares voted to get up, so it’s not inconceivable that shareholders who want to keep the prospect of a takeover alive will vote against their board’s recommendation.

Teck announced its plan to spin out its coal business from its copper and zinc operations in February.Credit: Bloomberg

The appeal of a rejection is not only that Glencore has already indicated it would be prepared to consider increasing its offer if the Teck board engages more deeply with it, but that a defeat of the demerger would put Teck into play.

Given the urgency with which the major miners are hunting for copper assets – BHP recently gained Oz Minerals’ shareholders approval for its $9.6 billion offer and Rio Tinto recently completed a $US3.3 billion buyout of Canada’s Turquoise Hill to give it a direct 66 per cent interest in Mongolia’s Oyu Tolgoi copper-gold mine – there’d inevitably be more parties interested if they believed Teck was available.

There might still be even if the demerger is approved.

While the continuing relationship between Teck’s coal assets and its more attractive base metals businesses could be regarded as something of a poison pill, and the Keevils’ super-voting shares (which would, under the demerger proposal, retain their status for six years) would remain an obstacle, there are ways to circumvent those issues if the bidder is determined and willing to pay up.

If it fails in its tilt at Teck the experience won’t be wasted. Nagle will have been able to gauge his own shareholders’ interest in the concept of separating his coal and base metals businesses.

Teck itself has said that the coal royalty stream could be monetised. It could be sold to an investor unconcerned by the reputational issues associated with coal but keen on a long-term stream of consistent cash flows.

Norman Keevil has, after initially adopting a “not for sale at any price” approach to Glencore, indicated he could be swayed by the views of the B-class shareholders.

Teck’s copper assets are probably the largest and most attractive available (if they become available) and, were they to be acquired, would significantly reshape the base metals industry.

If Glencore were to prevail, for instance, it would create the largest pure-play base metals business in the world and, by distancing both companies from coal, would probably result in a major uplift in the value of the assets.

Glencore’s undoubted trading skills could also add significant value and Glencoe has claimed there could be $US4.25 to $US5.25 billion of after-tax synergistic value from the combination of portfolios that are highly complementary.

Glencore already dominates the energy coal sector. Combining its energy and metallurgical coal operations with Teck’s would create a giant cash-generating machine which would have generated, Glencore has estimated, pro forma earnings before interest, tax, depreciation and amortisation last year of about $US26 billion.

If it fails in its tilt at Teck the experience won’t be wasted. Nagle will have been able to gauge his own shareholders’ interest in the concept of separating his coal and base metals businesses.

Before Glasenberg retired two years ago and handed the baton to Nagle he committed Glencore to reducing its carbon emissions, including those of its customers, to net-zero by 2050.

Former Glencore chief executive Ivan Glasenberg first engaged with Teck in 2020.Credit: Bloomberg

His preference was to allow the group’s mines to deplete until they run out of reserves, which is a cash-maximising strategy because Glencore’s status as the dominant seaborne producer and trader confers considerable influence over pricing; influence that could increase as global coal production volumes decreased.

Glasenberg acknowledged, however, that shareholder and external pressures could force Nagle to adopt more active strategies and either sell or spin out the coal division.

The Teck deal that Glasenberg and more recently Nagle have tried to convince the Canadians is compelling is a way to add a lot more value than executing a straightforward demerger.

For both Glencore and Teck shareholders (who would end up with about 24 per cent of the metals company under Glencore’s proposal) that might be more appealing than pursuing their own demergers independently, their status quos or less value-adding conventional asset sales.

Teck’s shareholders will have their fate in their own hands when they vote. Their decision, however, has the potential to reshape both the hottest sector of the resources sector and its coldest.

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