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Why Teck Resources is set for a King Solomon act next week

Shareholders torn between two offers to split the company in two
jonathan-price-credit-teck-resources
"Voting for separation has potential to unlock significant value for our shareholders," says Teck Resources CEO Jonathan Price

Teck Resources (TSX:TECK.B, NYSE:TECK) shareholders are in the middle of a vigorous tug-of-war between two different plans to cleave the company in two.

It all comes to a head Wednesday, when Teck shareholders will vote at a special meeting on Teck’s dual plan to: a) phase out its dual share class structure; and b) break the Canadian mining company into two separate companies – one owning B.C.’s steelmaking coal mines and the other owning copper and zinc mines.

Swiss giant Glencore has made a US$23 billion ($31 billion Canadian) unsolicited alternative offer, which requires Teck shareholders to reject Teck’s restructuring plan.

Teck needs a two-thirds majority vote to execute the plan. 

Teck chairman emeritus Norman Keevil, who holds a big voting block owing to his family’s ownership of class A shares (each equal to 100 class B shares in voting power), has already said no to Glencore’s offer.

"I believe that pursuing a sale or merger transaction now would rob our shareholders of significant post-separation value," Keevil said in a press release issued by Teck. "Glencore's proposal is the wrong one, as well as at the wrong time."

Following Keevil's rejection, Glencore appealed directly to Teck’s class B shareholders, urging them to vote against Teck’s separation plan. 

Glencore’s bid for Teck has stirred Canadian nationalist sentiment, with everyone from Premier David Eby to mining moguls Ross Beaty and Robert Friedland (who holds dual American-Canadian citizenship) coming out in defence of Teck and against Glencore.

"It would be foolish to entertain proposals from a single interested party prior to separation, which is why I also fully agree with Teck's rejection of Glencore," said Beaty, a Teck shareholder.

“Given Teck's wealth of expertise and its exposure to world-scale projects, I have no doubt all of us in the industry would be interested in partnering with them on growing Teck Metals post-spin-out, whether it be an operating partnership, merger, acquisition, or sale,” Friedland recently tweeted.  “It is short-sighted to sell to Glencore without exploring Teck's valuable opportunities across the industry.”

Canadian businessman Pierre Lassonde also announced he would acquire blocking position shares to ensure the Teck restructuring plan goes through. 

But two proxy services – Glass Lewis and Institutional Shareholder Services (ISS) -- have both recommended that Teck shareholders reject Teck’s restructuring plan. 

Both support the phasing out of Teck’s dual class share structure, which gives class B shareholders more voting rights, but recommend against Teck’s plan to separate into two pure-play mining companies: Elk Valley Resources (EVR), which would own Teck’s B.C. steelmaking coal mines, and Teck Metals, which would own Teck’s copper and zinc mines.

Teck’s metallurgical coal mines are its most profitable assets at the moment. According to Teck’s latest fourth quarter financials, coal accounted for 75% of the profits in 2022 – with gross profits from met coal at $6.4 billion, compared to $1.4 billion from copper and $771 million from zinc.

While Teck Metals would be a separate company, it would continue to benefit from the coal mines, as Teck Metals would retain “a substantial interest in steelmaking coal cash flows” under a "Transition Capital Structure" that would see Teck Metals receive quarterly royalty and share redemption payments equal to 90 per cent of EVR’s free cash flow. 

Glass Lewis has questioned this arrangement, suggesting it could devalue Elk Valley Resources.

“Although EVR will have operational control of the steelmaking coal assets, EVR is expected to have to pay 90 per cent of its free cash flow to the holders of the Transition Capital Structure,” Glencore has quoted Glass Lewis as saying. 

“This dynamic could conceivably weigh on EVR’s valuation, as EVR’s operation of the steelmaking coal assets…would seemingly only yield a fraction of the financial benefit.”

A mining company normally uses its profits to sustain and expand and grow its own assets, not use its profits to help grow some other company. Asked about these concerns, Teck said it has responded to concerns over the arrangement by shortening the payment period.

“Based on shareholder feedback, Teck amended our separation proposal to reduce the minimum term of the royalty paid by EVR to Teck Metals under the Transition Capital Structure from approximately 5.5 years to 3 years, providing a potentially shorter path to full separation,” Teck said in an email to BIV News. “Once EVR repays the royalty, it’s revenues will be retained and returned to shareholder through a prudent capital allocation strategy.”

As for Glencore’s “merger and demerger” plan, it involves acquiring all of Teck’s assets and putting Teck’s coal mines and Glencore’s coal mines into a new company, CoalCo. Everything else would be bundled into a base metals company -- MetalsCo. Glencore shareholders would own 76 per cent of the new companies and Teck shareholders would own 24 per cent.

Glencore said it would locate a MetalsCo industrial head office in Canada, but hasn’t stated which city. Premier David Eby, the Mining Association of B.C. and Greater Vancouver Board of Trade (GVBOT) have all recently voiced concerns about Vancouver potentially losing a major mining head office, should Glencore succeed in its takeover of Teck and not keep a head offi

In a letter to Canadian senior cabinet ministers, GVBOT points out that Teck's Vancouver head office employs 1,000 people.

"We are concerned that the potential acquisition of Teck Resources by Glencore could lead to the loss of a significant driver of Vancouver and Canada's economy and deal a severe blow to local innovation and Canada’s drive towards net zero," GVBOT says in its letter.

It’s not just Canadians who are coming out on the side of Teck’s proposal and against Glencore. Some major Teck shareholders and customers, including Norges Bank Investment Management (Norway’s central bank), Japan’s Sumitomo Metal Mining Co. and China Steel all have indicated they support Teck’s separation plan, not Glencore’s takeover plan.

In a blistering rebuke, London headquartered Bluebell Capital Partners said it welcomes Glencore’s decision to finally consider spinning out its thermal coal assets into a separate company – something the investment bank had suggested it do in 2021 -- but takes issue with the way it now plans to go about it: i.e. by folding Teck’s steelmaking coal mines in with Glencore' thermal coal mines.

Bluebell calls Glencore’s plan an “unsolicited business combination which is sub-optimal for both Glencore’s and Teck’s shareholders, creating unnecessary execution risk for both companies and fails to maximize shareholder value for all parties involved.”

It also points to Glencore's reputation -- damaged badly when it pleaded guilty to bribery and market manipulation.

"Additionally, the seeming ill health of Glencore’s governance is characterized by the many bribery and corruption investigations, in which Glencore has become historically embroiled, something we view as a clear symptom of a pathological company culture, which in our view Glencore’s board of directors has never publicly sought to change," Bluebell says in its letter to Glencore.

nbennett@biv.com

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