TCKRF - Teck Strikes $9.7 Billion Deal: Selling Coal Business To Glencore

2023-11-14 14:15:58 ET

Summary

• Teck Resources Limited has sold its coal business to several parties for a total of $9.7 billion in cash, with the deal expected to close in Q3 2024.
• Teck will retain all cash flows from the coal business until the closing of the Glencore transaction, estimated to be $1 billion.
• The sale allows Teck to focus on its future metals-oriented business and significant growth prospects in copper production.

Teck Resources Limited ( TECK ) has just announced a sale of its coal business. I didn't think they would sell the coal business to Glencore plc ( GLCNF ), but that's exactly what they did. The value is pretty good. The most important takeaways from the press release (emphasis added by me):

...Glencore has agreed to acquire 77% of EVR for US $6.9 billion in cash , payable to Teck at the closing of the Glencore transaction...

NSC has agreed to acquire a 20% interest in EVR in exchange for its current 2.5% interest in Elkview Operations plus US $1.3 billion in cash payable to Teck at the closing of the NSC transaction and US $0.4 billion paid out of cash flows from EVR...

Teck will continue to operate the steelmaking coal business and will retain all cash flows from EVR until the closing of the Glencore transaction, estimated to be US$1 billion ...

The company thinks the deal will close in the third quarter of 2024. I could see this turning into mid-2024, which would shave off some cash flows received.

In total, Teck receives $9.7 billion here.

It loses less than half of its revenue, but unfortunately, most of its gross profit before depreciation and amortization ( latest quarterly filing here ):

Earlier this year, Glencore offered $23 billion for the entire company. Since then, Teck has generated significant cash and made substantial investments into copper growth. The metallurgical coal business's perceived value likely went up slightly, as management indicated on the last earnings call (which I discussed here ). This previous bid indicates to me that the implied value of the remaining assets is something like $15 billion. Without the acquirers' premium, that would translate into $11.5 billion. Then again, copper didn't do so well over that period:

Most copper producers have also lost some value, implying the market isn't exactly optimistic about copper in the near term:

On the bright side, Teck is now pretty much a future metals-oriented company with significant growth prospects. Coal companies get assigned very low multiples, which I most recently wrote about here . The idea is that the copper/zinc-focused company will get assigned a higher multiple in the market. On top of that, Teck's copper production is accelerating in the coming years, which is rare among copper miners. Meanwhile, it is required (see McKinsey report ) to propel the energy transition forward.

The company projects to double its copper production by 2026 roughly. Its profits are also highly sensitive to copper prices because its operations are relatively high on the cost curve. The share price will likely behave almost like a call option on copper. Meanwhile, the influx of cash makes it highly unlikely this "option" expires anytime soon. The company could also benefit from joint ventures with Agnico Eagle Mines Limited (AEM) and PolyMet Mining Corp. (PLM) in the long term.

When I compare Teck's valuation to pure-play copper companies, it does tend to have a multiple at the lower end of the ranges:

Keep in mind its profits are falling substantially in the short term. However, I do think the company's current multiple is quite low (before or after the transaction, actually). The growth prospects are impressive. The current cash flows are quite unimpressive, but if you are bullish on copper for the long term, there's tremendous leverage here. At the same time, Teck is a safe place to bet on copper because it will have a lot of cash on the balance sheet and will be well capitalized to turn its potential growth into reality. I've assumed no debt will be hived off to Glencore, as it wasn't mentioned in the press release. It could improve things if that turns out to be different on the conference call.

Intuitively, I'm inclined to believe this deal isn't going to send the share price up 20% immediately. In the pre-market, the stock is up 5% and I won't be surprised if the stock ends the day up between 10% and down 10%. In the long term, it should take Teck a good bit higher. In the short term, I'm afraid the remaining free cash flow or earnings will be quite modest. This will get a higher multiple but officially coal isn't off the books until possibly Q3 2024. Perhaps traders will front-run the ESG money but it will take a bit of time for the new reality to sink in.

A great deal will also depend on what management will indicate it intends to use the money on. If they announce a $5 billion buyback along with this transaction, I could see the shares go up ~20%. If management says they're going to allocate the capital wisely, build up mines, and see great opportunities for acquisitions in light of the coming bull market it likely ends up somewhere in my range.

I've sold ~1/3rd of my position in the pre-market. Depending on what's said on the call and the price action at the opening, I'll hold on or sell the rest of the position. Having said that, I was invested here because of the bidding war that seemed to be ongoing. Perhaps because of the consensus (but perhaps mistaken) gloomy outlook for coal and the fact that Teck wanted to get rid of these assets, the bidding didn't really get frenzied. Glencore is actually up 3.22% on the news.

Although I'm likely throwing in the Teck towel for now, I do think there is still a lot to like for long-term shareholders. For long-term copper bulls and all sorts of future-oriented metals ETFs, Teck Resources Limited should now become one of the most important vehicles to express that view.

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