Teck Resources Ltd. TECK-B-T has agreed to sell its coal business to Swiss commodities trading giant Glencore PLC and two Asian steelmakers, in a US$8.9-billion transaction that requires federal approval, and will be closely scrutinized by Ottawa before it can proceed.
Vancouver-based Teck has been fielding offers for its core metallurgical coal business since the spring, when an earlier plan to spin it off was cancelled at the eleventh hour because of insufficient shareholder support.
Founded in 1913, Teck is Canada’s largest diversified mining company, a major employer in British Columbia and one of the oldest miners in the country.
Glencore GLNCY originally proposed buying all of Teck in April, including the company’s copper and zinc mines, in what would have been a US$23.1-billion cash and stock deal. Teck repeatedly rejected Glencore’s advances, citing a number of risks – some jurisdictional, some related to the deal’s execution and some related to concerns about Glencore’s past bribery and market manipulation settlements with international regulators.
In an interview with The Globe and Mail, Jonathan Price, Teck’s chief executive officer, called the deal to sell the coal business a “very different transaction.”
He pointed to a long list of commitments Glencore has made, including that it will maintain jobs in Canada, make billions in capital expenditures over the next few years and increase spending on research and development.
According to the terms of the transaction, which were set to be unveiled on Tuesday, Glencore has agreed to pay US$6.9-billion for 77 per cent of Teck’s coal business, known as Elk Valley Resources. Japan’s Nippon Steel NPSCY will pay US$1.7-billion and swap its interest in one of Teck’s coal operations for 20 per cent of the coal business. South Korea’s POSCO PKX-N will swap its interests in two of Teck’s coal operations for 3 per cent.
The proposed sale price for the coal business is slightly less than some on Bay Street had thought the unit was worth. Jefferies analyst Christopher LaFemina said in a note to clients last month that the business had a value of at least US$11-billion.
Unlike Teck’s earlier attempt at restructuring, under which it would have sold its coal unit to shareholders but continued collecting royalties on the business for about a decade, the new proposed transaction would be a clean split.
“Shareholders have told us very clearly that they would like to see a separation of steelmaking coal from base metals,” Mr. Price said, referring to investor concerns about risks related to the environmental impacts of coal. “They’d like to see that done in a simple and direct manner, and that’s exactly what we’ve achieved through this transaction.”
The transactions with Glencore and the steelmakers don’t require a shareholder vote, meaning whether the deal closes will likely depend on the outcome of a review by the federal government. Ottawa has the power to block a foreign takeover of Teck on either national security or net benefit grounds, the latter of which relate to the economic impact of the transaction.
In a statement, Teck said it doesn’t expect the deal with Glencore to close until the third quarter of next year, in large part because of the expected length of that government review.
Earlier in the year, several federal ministers expressed reservations about Glencore, a foreign miner, buying all of Teck. “We need companies like Teck here in Canada,” said an April letter to the Greater Vancouver Board of Trade from Industry Minister François-Philippe Champagne, Natural Resources Minister Jonathan Wilkinson and Deputy Prime Minister Chrystia Freeland.
British Columbia Premier David Eby said in June that he had concerns about Glencore buying Teck’s coal operations because of Glencore’s past regulatory offences related to bribery and corruption. While Mr. Eby doesn’t have the authority to block a Glencore bid for Teck, he has suggested he would petition Ottawa to do so.
“Nobody has given us an assurance that the deal will go through,” Gary Nagle, Glencore’s CEO, said in an interview.
But he said he was confident the deal would be allowed. He noted Glencore’s already large footprint in Canadian mining, and the new commitments it has made. Glencore employs roughly 9,000 people in Canada. The bulk of its operations here are a result of its 2013 acquisition of fellow Swiss miner Xstrata PLC, which bought former Canadian mining giant Falconbridge Ltd. in the mid-2000s.
If the deal is approved, Teck will become a much smaller company in terms of revenue and market value, with a narrower focus on copper and zinc, both of which are critical minerals. Last year, coal accounted for 60 per cent of Teck’s revenue and 75 per cent of its profit. Earlier this year, the company put a large copper mine, called QB2, into production in Chile. The operation has been plagued by cost overruns.
Despite generating billions in free cash flow every year, Teck’s coal business has weighed down its valuation, because few investors are now willing to hold coal stocks in their portfolios, owing to concerns about the detrimental impact the fossil fuel has on the environment. By selling its coal business, Teck hopes to gain a higher valuation in the market over time.
If Glencore ends up acquiring Teck’s coal business, it plans to eventually split itself in two, creating a giant coal company that holds its thermal coal assets and Teck’s metallurgical coal assets, and another company to hold its metals mines and energy trading assets.
Mr. Price said Glencore has signed a two-year “standstill” agreement, which will come into effect after the completion of the coal transaction. The agreement means Glencore can’t make another takeover bid for Teck until the standstill expires.
Teck’s controlling shareholder, Norman B. Keevil, said earlier in the year that he was opposed to Glencore buying all of Teck. He told The Globe at the time that “Canada is not for sale.” Mr. Keevil later softened his stance, saying that if Teck’s management, its board and its shareholders were in favour of a deal with Glencore, he would not exercise his veto power.
In a statement, Mr. Keevil said the new transaction positions Teck for continued growth as a major Canada-based producer of copper and future-oriented metals, while preserving jobs and operations at the coal mines in B.C’s Elk Valley.
With reports from Eric Reguly and Andrew Willis