Teck Resources Ltd. TECK-B-T launched a sweeping restructuring on Tuesday by announcing plans to spin off its coal business and end the founding Keevil family’s six-decade run at the helm of the country’s largest base metals miner.
Vancouver-based Teck is asking shareholders to approve hiving off its steelmaking coal mines in British Columbia into a new company called Elk Valley Resources Ltd. Teck valued its offspring at $11.5-billion and will list Elk Valley on the Toronto Stock Exchange. The parent will focus on increasing copper production at mines in North and South America, and be renamed Teck Metals Corp.
“Our goal is to create two great, sustainable companies, set up for success,” Teck chief executive Jonathan Price said in an interview. Teck spent several years reviewing its strategy, a process that included talks on selling the coal division. Mr. Price said the two businesses have “very different fundamentals,” with stable but relatively flat demand for coal from steelmakers, while the move to decarbonize the economy translates into an “extreme increase in demand for copper, and a need for new copper mines.”
Teck currently earns the majority of its profit from selling coal to Asia-based steelmakers, and has used this cash to expand copper production with projects such as the $7.5-billion Quebrada Blanca (QB2) mine in Chile.
After the spinoff, Teck will continue to receive cash from Elk Valley during a transition period of up to 11 years, through royalty payments and dividends on $4.4-billion worth of preferred shares. Teck predicts it will receive at least $14-billion from its offspring, cash earmarked for expanding copper production fourfold over the next decade. Higher prices for steelmaking coal could increase the Elk Valley payout to $34-billion.
“The proposed structure is an elegant solution to creating an attractive copper growth focused [and ESG friendly] company via Teck Metals that will continue to benefit from elevated near-term steelmaking coal free cash flow,” analyst Orest Wowkodaw at Bank of Nova Scotia said in a report.
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Teck shareholders will receive one Elk Valley share, plus cash, for every 10 Teck shares they own, if the spinoff is approved. Teck’s current senior vice-president for coal, Robin Sheremeta, will be CEO of Elk Valley, while Mr. Price remains CEO of Teck.
Two of Teck’s steelmaking customers, Japan’s Nippon Steel Corp. and South Korea’s POSCO, will swap stakes in the company’s B.C. coal mines for minority holdings in Elk Valley. Nippon will pay Teck $1.025-billion for a 10-per-cent stake in both Elk Valley and the same portion of Teck’s future cash payments from the coal business. POSCO will own 2.5 per cent of the coal company and its future cash payout to Teck.
Teck’s decision to exit the coal business comes at a time when many investors are avoiding coal miners over concerns with the greenhouse gas emissions. In 2008, Teck made coal its major business by acquiring Fording Canadian Coal Trust for $14.1-billion. Teck also recently sold its stake in Alberta’s Fort Hills oil sands project for $1-billion.
Vancouver’s Keevil family founded Teck in 1962 by acquiring small gold mines in Ontario and Quebec. After decades of acquisitions and mine developments, the family now controls the company through its ownership of Class A shares that each carry 100 votes. On Tuesday, the company announced plans to convert the multiple voting shares into single-vote Class B shares in six years, with the Keevils’ support.
“The sunset on the multiple voting rights will modernize Teck’s governance and provide a simplified and competitive capital structure, following an appropriate continuity period, which we believe will benefit Teck and all of its shareholders,” said Sheila Murray, chair of Teck’s board.
The proposed conversion will see multiple-vote shareholders initially receive one new Class A common share and 0.67 of a Class B share, which means the Keevil family gets a 67-per-cent premium for giving up control. At Teck’s current share price, the premium is worth approximately $300-million. Analysts said the conversion means existing minority shareholders face “minimal dilution” of just 1 per cent of their ownership.
“In our view, the removal of the dual-class share structure is a positive governance initiative,” Mr. Wowkodaw said. “However, this change also makes the company potentially vulnerable to a future acquisition.”
When Teck began work on the spinoff of its coal mines, Mr. Price said the board and management decided Elk Valley would have a single share class structure. “That decision opened the door to a conversation between the board’s special committee and owners of Teck’s Class A shares on modernizing and simplifying the company’s governance,” Mr. Price said. He said terms of the conversion “benchmark very well against the terms of similar transactions.”
Teck shareholders are expected to vote on both the spinoff and share conversion at the company’s annual meeting in April, and the spinoff is expected to be completed in the second quarter of 2023.
Teck’s advisers on the transactions are investment banks Barclays Capital Canada Inc., Ardea Partners LP, TD Securities Inc. and CIBC World Markets Inc. The Teck board is working with BMO Capital Markets, Goldman Sachs & Co. LLC and Origin Merchant Partners.
On Tuesday, Teck also announced record financial results for 2022, along with plans to buy back up to $250-million of its own shares this year. The company’s profit attributable to shareholders was $4.1-billion last year, compared with $2.9-billion in 2021, as revenues increased to $17.3-billion from $12.8-billion.
But Teck’s fourth-quarter results fell short of analysts’ expectations, with adjusted earnings per share of $1.07 versus estimates of $1.25 per share, in part owing to extended maintenance on smelters in Trail, B.C.