Teck approached Glencore and Lundin as it weighs options for core coal business

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Teck Resources Ltd. has held talks with Lundin Mining Corp. and Glencore PLC as the Vancouver mining company continues to weigh its options for unloading its highly profitable but out-of-favour coal business.

Mining industry sources said that Teck chief executive officer Don Lindsay held deal talks with Toronto-based copper miner Lundin and Glencore, the Swiss mining and commodities trading giant, in the past year or so, but discussions with both companies ultimately went nowhere.

The sources said that Teck, which is Canada’s biggest base metals mining company, with a market value of $17.5-billion, is working with the Toronto office of Barclays Investment Bank on the possible sale or spinoff of its coal division. They said that a spinoff as a separate, publicly traded entity appears more likely than a sale because most diversified mining companies want to eliminate coal from their portfolios, and it is getting harder to secure bank financing for coal deals. Barclays itself has faced public scrutiny for its participation in coal transactions.

The Globe and Mail is not identifying the sources because they were not authorized to speak publicly.

Teck Resources’ revenue jumps on record high copper prices

Teck has talked openly in the past about possibly spinning off, or selling its coal assets as it attempts to increase its exposure to copper to which investors ascribe a higher valuation.

The sources said that one option discussed would have seen Teck and Glencore combine their “green” metals, such as copper and cobalt, and shunt the coal assets of both companies into a separate company.

In an interview, Mr. Lindsay said the board is “vetting intensely the portfolio makeup,” but added that was “old news.”

When asked to comment on Teck’s discussions with Glencore and Lundin, he said, “I really can’t comment, and I find it all kind of amusing what people speculate about.”

Mining companies routinely pitch each other on deal ideas, and Teck has pursued asset sales in the past that did not pan out, such as the potential sale of its 80-per-cent stake in Peru’s Zafranal copper mine in 2019.

Glencore declined to comment. A spokesperson with Lundin said the firm doesn’t comment on M&A speculation. Barclays also declined to comment.

Bloomberg reported earlier this week that Teck is actively exploring options for its metallurgical coal business, including a sale or spinoff. Metallurgical coal, also known as coking coal, is used to make steel.

Even as metallurgical coal prices have hit record highs this year, Teck’s shares are trading far from their peak levels. Owing to investor concerns over the damaging environmental footprint of coal, investors don’t ascribe nearly as much value to coal companies as they do to copper producers. Metals such as copper and nickel are viewed more favourably by investors because of their growing use in clean energy, such as wind power, solar energy, and as a key component in electric cars.

“Valuations for met coal operations have been declining in recent years due to ESG concerns, while copper valuations are expanding due to its role in the energy transition,” Sam Crittenden, analyst with RBC Dominion Securities, wrote in a note to clients on Wednesday. (ESG refers to environmental, social and governance issues.)

The world’s biggest mining companies – Glencore, Teck, BHP, Vale and Anglo American PLC among them – are plotting ways to dump, or greatly reduce their exposure, to their carbon-intensive assets, mostly coal, oil and iron ore. “We are about to see a game-changing scenario,” Mark Cutifani, CEO of Anglo American, said in an interview with The Globe in February. “At some point soon, there will be a restructuring of businesses and assets.”

That process is well under way and reshaping several big mining companies as they prepare for a net-zero emissions future – something Teck committed to in early 2020 when it got caught up in a political firestorm over its oil sands exposure. (Teck is still a part owner in the Fort Hills oil sands operation.) Miners everywhere are looking to concentrate on the metals – copper, nickel, zinc, cobalt, aluminum and ferroalloys – that are essential materials for the electrification of entire industries, such as car production. The dirtiest mining products would be sold, spun off, wound down or closed.

Rio Tinto got the process going in 2018, when it sold the last of its coal assets in Australia to various buyers, including Glencore, for just under US$4-billion. Since then, Glencore has vowed to deplete its coal operations to fulfill its net-zero pledge; it will not add to its coal reserves to offset production.

BHP in August agreed to sell its oil and gas assets to Woodside Petroleum Ltd. of Australia and is planning to sell its thermal coal operations (thermal coal is used to generate electricity). In June, Anglo American spun off is South African coal division, creating a company called Thungela Resources Ltd. with its own stock market listing.

Unlike at BHP, where fossil fuel operations are a relatively small part of their business, at Teck coal takes centre stage, generating by far the biggest component of its current revenue and profit.

But with metallurgical coal prices trading at historically high levels because of brisk demand for steel as global economics stage a comeback post-COVID-19, the idea of selling the business now has puzzled some analysts. Scotia Capital analyst Orest Wowkodaw wrote in a note that Teck needs the ample free cash flow generated by the coal business to fund the construction of its QB2 copper mine in Chile, which is only about 60 per cent complete.

“We do not believe that the timing makes sense for a potential near-term strategic move for the coal business,” he said. “This is a concept to potentially revisit in the 2023+ time frame once QB2 is ramped and is generating positive free cash flow.”

Credit Suisse analyst Curt Woodworth estimated in a note that Teck’s coal business could be worth at least $11.5-billion and said a sale or spinout would likely give the stock a much-needed boost.

“Teck needs to do something to catalyze value, as solid execution on QB2, a major bull move in copper, and now all-time record high coal prices have still not allowed the stock to move above the 2018 high,” he said.

Shares in Teck rose by 3.5 per cent on Wednesday on the Toronto Stock Exchange to close at $33.80.

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