2023-06-01 06:12:27 ET
Summary
- Glencore's second acquisition offer of $22.5 billion for Teck Resources has been unanimously rejected by the Canadian mining company's board.
- Bluebell Capital Partners, an activist fund and shareholder in both companies, criticized the deal as "alarmingly illogical" and harmful to both companies.
- Teck Resources is also planning to spin off its coal assets into a new company.
- Glencore released positive Q1 results. In addition, the company confirmed its yearly outlook, and so we reaffirm our valuation.
Last year, here at the Lab, we provided two follow-up notes called " M&A Optionality " for both Rio Tinto (RIO) and BHP Group (BHP). Today, it is time to review Glencore-Teck's potential merger with also a demerger proposal (GLCNF) (GLNCY). At first sight, this deal sounds strategic and rational. Before commenting on the possible transition, in February, Teck (TECK) outlined a strategic plan to spin off its coal division. In detail, the remaining business is related to energy transition with a division called Teck Metals .
However, we believe that Glencore's proposal is more effective in unlocking synergies between Teck and Glencore coal mines. How? The idea is to create a newCo combining the companies' non-ESG division to build a player large enough to fund its growth. In detail, the proposed deal would involve the combined thermal and met coal segment as well as the ferrochrome operations. Both Teck and Glencore will solve a Wall Street investor concern on ESG. But, there is a challenge with the valuation. Indeed, the Swiss commodity giant has seen the door slammed in its face, with a unanimous vote of the Teck board which once again rejected the $22.5 billion takeover second offer . The new proposal also included an $8.2 billion cash portion.
The potential merger could create a synergy value between $4.25 and $5.35 billion. While Teck's current proposal solves its own ESG issue, our internal team sees a significant risk that Glencore may not be willing to increase its offer for Teck shareholders whilst maintaining a value-accretive deal. According to Bloomberg , Glencore is preparing a third offer to sweeten the deal and on a positive note, at April-end, Teck shareholders did not vote on the internal demerger plan. Should Teck's proposal be approved, the likelihood of a broader Glencore/Teck deal falls materially in our view. It is also important to report that Norman B. Keevil , special advisor to the Teck Resources board, strongly advises the Glencore transaction.
Source: Glencore proposal
Glencore proposal raised again the question of the coal spinoff. Here at the Lab, since our initial buy rating titled " Commodities Mix Makes It Our Top Pick For Diversified Miners ", we highlighted how the company coal exposure was supportive in the current macro environment, and despite being not popular with investors, remains crucial to fill the gaps in the energy transition. On the other hand, it is important to emphasize that Glencore continued to engage with its stakeholders on its coal strategy, and had not collected negative indications from its shareholders base to accelerate a coal spin-off. As already reported in Richemont, Bluebell Capital Partners was one of the few investors that have come forward to stop the deal . Bluebell which has shares below the disclosure threshold of both Teck and Glencore - sees this operation as smoke screens and sent a letter to Glencore top management criticizing the deal and defining it as " illogical " and harmful to both companies. Antitrust is also a concern, especially in China for zinc and copper. In 2013, Glencore merged with Xstrata; however, we believe this is not going to be a big impediment.
In the meantime, Glencore agreed to buy stakes in the MRN bauxite mine for a 45% equity stake and also in the Alunorte alumina refinery for an additional equity stake of 30%. Glencore will pay Norsk Hydro approximately $700 million with a deal competition expected in 2023 second half.
Q1 Production Update & Conclusion
Looking at the recent Q1 production release, copper output was softer than consensus estimates with adverse weather conditions that impact the Collahuasi mine. The cobalt production partially offset the copper division thanks to the Katanga mine recovery. Nickel and coal output were weaker with a strike at Raglan mines and geotechnical anomalies in South Africa. Despite that, Glencore's marketing division continues to perform very well (especially in energy). Fiscal Year 2023 EBIT is forecasted at the top-end guidance ($2.2-3.2 billion range). Here at the Lab, we find this evolution quite remarkable given the fact that energy prices are significantly lowered compared to the previous year.
Source: Glencore Q1 production report
Following the above results, the company left unchanged its FY23 production guidance.
The rationale for Teck/Glencore was explained as being driven by value, rather than by ESG concern. This might be another supportive catalyst to move on with the deal. Having confirmed the guidance, we decided to leave unchanged our buy rating . Our investment thesis is also supported by a solid balance sheet with two internal cash cows: marketing and coal divisions. In addition, the company has a current upside based on the energy transition revolution with direct exposure to nickel and copper (which are vital to produce batteries). Consistent with our mining valuation, we used a 50%/50% average of EV/EBITDA and NPV analysis, confirming a price of £5.5 per share. In addition, the company has a higher FCF yield compared to Rio Tinto . As a reminder, we used a WACC of 10%. Given Mare Evidence Lab's outlook on shareholder returns and earnings, we rate Glencore with an outperform rating. Our downside risks include lower guidance, political risks, adverse weather conditions, corporate governance issue, lower commodity prices, and M&A activities.
For further details see:
Glencore: M&A Risk Offers A Possibility To Enter