2023-05-03 17:33:53 ET
Summary
- Teck Resources Limited, a metals and coal producer, has proposed a complex plan to spin off coal assets to focus on energy transition assets.
- Glencore plc made a bid, later improved, for Teck, but management pushed forward with their separation plan.
- Teck scrapped the vote on its separation plan, forcing the board to engage more seriously with Glencore.
- Other potential suitors include Freeport-McMoRan Inc., Anglo-American, Vale, and Sumitomo Metal Mining.
- Glencore's proposal sets the benchmark for other deals, and the most likely outcome is that current shareholders see a small premium from the current share price.
Teck Resources Limited (TECK) looks like an exciting company to hold. It is a metals and coal producer. The company proposed a convoluted plan to spin off its coal assets to let its energy transition assets shine and re-rate higher. While that process was ongoing, Glencore plc ( GLCNF ) put forward a bid (later improved it slightly). At the last minute Teck's management/board killed the convoluted separation. Meanwhile, Glencore publicly complained of no engagement and expressed a willingness to improve their offer. Management and the board may have to engage more seriously with Glencore.
What's especially interesting is that the board/management have proposed that separating the metal assets from the coal assets is a great idea. The Glencore route is a clear route to such an outcome.
For some reason, management doesn't seem to like the Glencore combination, as they have been in talks since 2020. The convoluted spinoff may have been partly inspired by a desire to be able to continue to evade Glencore's advances.
But Glencore publicly appears very eager and willing to up its deal proposal.
This is hard for a board to ignore. However, Glencore isn't the only potentially interested party. It has been reported that Freeport-McMoRan Inc. ( FCX ), Anglo American plc ( AAUKF ) and Vale S.A. ( VALE ) have approached Teck about its base metals business. Teck confirmed to analysts on a call after canceling the vote on the separation that it was weighing alternatives.
Sumitomo Metal Mining Co., Ltd. ( SMMYY ) said it supported Teck Resources' plan to separate and it is a big owner (~18% of the A-shares). There aren't a lot of A-shares compared to B-shares. (around 8 million vs 500 million). However, the A-shares come with 100x voting rights. What makes this an interesting shareholder is that Sumitomo Metal Mining is a Japanese trading house (similar to Glencore) that is also interested in future-oriented metals. Warren Buffett is a large shareholder in Sumitomo and in this interview said he wouldn't go over 9.9% without consent. However, Greg Abel then added in the same interview that the conglomerate is also interested in any further “incremental opportunity” with each of the firms in terms of deal-making.
“We would very much evaluate it quickly. Warren highlighted the bigger the better, and that he’ll answer the phone on the first ring. And we’ll never run out of money. They can call us anytime,” said Abel.
They just put it out there, Sumitomo has financing at the ready when it needs it.
Teck is currently trading at a share price ($44.29) that implies a market cap of around 22.9$ billion. The Glencore deal (according to Glencore) was worth around $18.5 billion right away and $27 billion when counting synergies and coal de-merger rerating (based on April 2 figures). Glencore's share price hasn't changed much since that time. It should be roughly still in that ballpark. Teck has acknowledged re-rate value given its own spinoff proposal, which will help to see the value of the Glencore offer.
Glencore's proposal includes a road (very attractive to institutional shareholders) to separate coal assets quickly. If Teck management wants to do another deal, this is now the benchmark. Because only $8 billion is in cash and the rest in stock, the offer is subject to market gyrations, making it a hard deal to speculate on. There is bound to be some volatility, especially with an upcoming recession front and center on investors' minds. It is precisely that potential recession that's also diverting investors' attention away from the energy transition. The operators are looking beyond the recession and are interested in securing assets that will work once we're past that.
As long as we're still approaching a recession but aren't exactly in it, I can see copper companies struggling a bit. China's re-opening hasn't turned out as bullish as it was supposed to be (so far). It is very possible Teck would trade back down $12 or so, or back to $32 if things muddle along without any new proposals and the board keeps Glencore at a distance.
However, long-term shareholders won't accept that. It would require much lower copper prices to justify that. The much more likely scenario here is that we'll see either other bids or another improvement out of Glencore. The most likely outcome is that current Teck Resources Limited shareholders will ultimately see a small premium from here. There is a possibility shareholders will wait a long time to see $44 again (if everything falls apart and we go through some recession). The most interesting scenario develops where we'll see something of a bidding war here and shares go for a big premium here. It's not my base case, but miners have been picking off big copper assets. Rio Tinto Group ( RIO ) locked up Turquoise Hill and BHP Group Limited ( BHP ) picked off Oz Minerals. This is one of the few big assets that can be picked up to stock up for the energy transition.
For further details see:
Glencore Is Persistent In Pursuit Of Teck Resources