Teck Resources Ltd.'s zinc and lead smelting and refining complex, left, in Trail, B.C., in 2012.DARRYL DYCK/The Canadian Press
When BHP Group BHPLF spun out a collection of unwanted mines back in 2015, irreverent Australian analysts and media showed their disdain for the business by labelling it “CrapCo.”
Executives at CrapCo – eventually branded as South32 Ltd. SOUHY – got the last laugh. Their portfolio of aluminum, manganese and steelmaking coal properties turned in better stock market performance than parent BHP for several years after the launch. The price of South32 shares has doubled since their debut.
South32′s humble roots are worth revisiting as resource companies prepare for at least three large spinoffs on the Toronto Stock Exchange.
Teck Resources Ltd. TECK-B-T is exploring splitting off its steelmaking coal business, worth an estimated $11-billion, to focus on copper and other future-friendly metals. The Vancouver-based miner could detail plans for the country’s largest coal company when it releases financial results on Tuesday.
In May, Paris-based TotalEnergies SE TTE-N is scheduled to ask shareholders to approve creation of a $2-billion-plus public company that owns its stakes in two oil sands projects. And Brazil’s Vale SA is working on raising money to pay down debt by spinning out a stake in nickel and copper mines the company values at $40-billion, including Canadian properties acquired in the takeover of Inco a generation back.
Count on some variation of the CrapCo nickname to be slapped on Teck’s British Columbia mines and Total’s Alberta projects. These are serious greenhouse-gas emitters, and the current owners are exiting because they don’t fit low carbon growth strategies. A great many investors will see the words “coal” and “oil sands” and steer clear on well-founded environmental, social and governance (ESG) concerns. These stocks will debut as orphans, relatively small compared with rivals and in unloved sectors.
However, both Teck’s coal business and Total’s stakes in the Fort Hills and Surmont projects are highly profitable businesses that throw off significant cash when commodity prices go their way. Teck, the world’s second-largest coal exporter, made a gross profit of $5.5-billion on coal sales of $8.7-billion through the first nine months of 2022.
Yet when these two spinoffs debut on the TSX, it’s highly likely environmental issues will weigh heavy on their share prices. Market dynamics will also undermine the newly launched companies, as past experience at companies such as BHP shows many shareholders dump stakes in spin-outs the moment they receive the stock.
These two CrapCo stocks could start their lives as public companies at valuations that are incredibly cheap, compared with peers in the mining and oil and gas sectors. That would create an opportunity for thick-skinned institutional investors, or rival resource companies.
The country’s largest pension funds have ESG strategies that include funding the transition away from fossil fuels. If the Canada Pension Plan Investment Board or one of its peers can acquire billions of dollars in future cash flow from Teck’s mines or Total’s oil sands for a rock-bottom price, and use the money to fund a greener future, that’s a winning investment. These spinoffs may be worth more to private owners than they are in public markets.
Alternatively, if the spin-outs flop with public investors and their valuations plummet, the companies will become takeover targets. Teck’s mines would fit neatly into the portfolio of a rival steelmaking coal producer such as Glencore PLC. Total’s oil sands projects are obvious targets for their co-owners – Suncor Energy Inc. SU-T operates Fort Hills and Conoco Phillips runs Surmont.
As investors in BHP found out seven years ago, being handed a stake in a brand-new resource company can be a blessing, not a curse.
Andrew Willis