Teck Resources Ltd. TECK-B-T is exploring a spin-out of its steelmaking coal division, or other ways to exit its largest business, as part of a strategic shift to mining metals that will power a greener economy.
Vancouver-based Teck, the country’s largest coal producer, said on Thursday it is “evaluating alternatives for its steelmaking coal business, including the possible spin-out of an interest in that business to its shareholders.” The announcement came after Bloomberg reported the company could announce a transaction as early as next week.
Teck’s coal businesses, made up of mines in southeastern British Columbia, would be worth between $8-billion and $11-billion as a freestanding company, according to analysts. Almost all Teck’s steelmaking coal is exported to Asia.
Teck is also a major copper and zinc producer, and in recent years, it invested heavily in expanding production of metals essential to a low-carbon economy. Coal accounted for $8.7-billion of Teck’s sales and $5.5-billion of the company’s gross profit in the first nine months of 2022, or just over half the company’s revenues and 70 per cent of its profit.
In 2008, Teck made steelmaking coal – also known as metallurgical or met coal – its dominant business by acquiring Fording Canadian Coal Trust for $14.1-billion. Since then, many investors have soured on coal due to its greenhouse gas emissions.
Teck has previously said it is reviewing options for its coal division. The company recently appointed a new chief executive officer, Jonathan Price, who joined Teck in 2020 from Australia’s BHP Group Ltd. BHP-N, where he oversaw an exit from the oil and gas business.
“The idea of separating the company’s assets into a carbon intensive business (metallurgical coal) and a non-carbon business (base metals) has been openly under consideration for several years,” Scotia Capital analyst Orest Wowkodaw said in a report. He said spinning out coal mining would significantly boost Teck’s investor base and stock price.
“While the company produces high quality metallurgical coal used for steelmaking, some investors view all coal as ESG negative,” Mr. Wowkodaw said.
Teck’s stock price closed up 5 per cent on Thursday on the Toronto Stock Exchange following news of the potential exit from B.C. mines that first began producing coal over 120 years ago. Teck is controlled by Vancouver’s Keevil family through a dual class share structure, and any sale or restructuring of the business requires the family’s support.
The potential spin-out reflects the fact that no mining company was willing to buy the division at a price acceptable to Teck, according to analysts. In 2021, The Globe and Mail reported Teck held talks aimed at selling its coal unit with Lundin Mining Corp. and Glencore PLC.
In a report on Thursday, analyst Sam Crittenden at RBC Capital Markets said, “We don’t see an obvious buyer for the met coal business.”
Teck said in a news release it confirmed the review of coal division at the request of the Investment Industry Regulatory Organization of Canada and the New York Stock Exchange.
“No decision has been reached to proceed with a transaction and there can be no assurances that any transaction will eventuate,” the company said. “Teck does not intend to make any additional comments regarding this matter unless and until a formal decision has been reached.”
Teck’s coal mines are major sources of employment in B.C.’s Elk Valley. The company said any transaction is expected to create value for shareholders and “support continued benefits for communities and Indigenous peoples in the areas where Teck operates.”
This year, Teck expects to start production at its QB2 copper mine in Chile, after spending approximately $7.5-billion on the project. Analysts forecast this will shift the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) from 63 per cent coal and 17 per cent copper in 2022 to 53 per cent of EBITDA from copper and 32 per cent coal in 2024.
Teck’s stock market valuation is currently at a significant discount to pure-play copper miners, according to Mr. Crittenden. He said Teck can close the gap with peers by bringing QB2 into production and “diversifying away from coal.”
In October, Teck sold its 21 per cent stake in Alberta’s Fort Hills oil sands project to partners Suncor Energy Inc. SU-T and TotalEnergies SA TTE-N for $1-billion. Paris-based TotalEnergies is now in the process of spinning out its oil sands holdings as a new public company, listed on the Toronto Stock Exchange.
Teck’s CEO, Mr. Price, joined the company in 2020 as chief financial officer after 14 years at BHP, where he served as chief transformation officer. He took the top job in September, succeeding long-time CEO Don Lindsay, who oversaw the purchase of Fording.
Melbourne-based BHP recently exited the oil and gas sector in a US$19.6-billion transaction, in order to focus on mining copper, nickel and other minerals that are critical to a green economy. BHP also tried to sell its Australian thermal coal mining division last year, but failed to find a buyer and now plans to wind down the business.