As the resources industry becomes less local and more global, crucial investment decisions are often determined in far-flung capitals. Such is the case with Teck Resources, TECK-B-T Canada’s largest diversified mining company. Sometime in the next two days, possibly the next few hours, an investment committee in Beijing will make a decision that will greatly influence – perhaps even determine – Teck’s future.
China Investment Corp., one of the world’s largest sovereign wealth funds, owns 10.3 per cent of Teck’s single-vote class B shares, making it the largest shareholder of that class. It is on course to become the key vote Wednesday when Teck’s proposal to hive off its coal business from its base-metals operations goes to a shareholder vote in Vancouver.
If CIC endorses Teck’s proposal, the odds might well tilt in Teck’s favour. If it does not, Teck’s biggest strategic move in a decade seems likely to fail, handing Glencore, the Swiss commodities giant that covets the Canadian company, a potential route to a merger. Teck has rejected two such proposals from Glencore since late March.
As far as we know, the numbers suggest the vote is on a knife edge, with both Teck and Glencore fidgety about the outcome. That’s why CIC’s vote is critical.
Two-thirds approval from both the class A and class B shareholders is required to split Teck to form Teck Metals and Elk Valley Resources, as the new metallurgical (steel-making) coal company would be called. Ditto for a “sunset” proposal that would see the A shares, which carry 100 votes apiece and are controlled by chairman emeritus Norman B. Keevil and his ally, Sumitomo of Japan, converted to B shares in six years at a fat premium.
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You would think that CIC would naturally vote in favour of Teck’s plan. A representative of the Chinese government has been a member of Teck’s board of directors since 2016 and has not been seen as unfriendly to Teck’s senior executives. The board voted to approve the idea of splitting the company and, on April 13, voted to reject Glencore’s revised offer to merge with Teck to create a base-metals giant and carve out a coal business that would hold Teck’s metallurgical and Glencore’s thermal coal operations.
But is CIC truly on Teck’s side? There is a good chance it is, but it’s not a sure thing. Citing unnamed sources, Bloomberg reported on April 14 that CIC was leaning toward voting against the proposal to split the company. Teck was quick to suggest the opposite. In an interview last week with The Globe and Mail, Teck chief executive officer Jonathan Price expressed confidence that CIC was on Teck’s side. “CIC has been a long-term shareholder of Teck,” he said. “They’ve been with us since 2009. It’s a very open, collaborative relationship, and we look forward to continuing to work with them going forward.”
But CIC has made no public declaration, offering not even a hint, as to which way it will go. It is believed the Chinese have rebuffed Glencore CEO Gary Nagle’s request to meet with CIC’s investment committee (Glencore would not comment). The committee will almost certainly meet by Tuesday, if it hasn’t already, to nail down its voting plan. Whether that plan will be revealed immediately or on the day of the vote is not known.
What is known is that CIC has been reducing its stake in Teck, suggesting that it is no longer a core investment, which in turn suggests it could simply be looking for top dollar from Glencore or any other bidder that captures the board – and Mr. Keevil’s – imagination. A few years ago, CIC held a 17.5-per-cent equity stake in Teck; now it’s 10.3 per cent.
CIC is not the only wild card. The voting intentions of a few other fairly big investors, including U.S. fund manager Dodge and Cox, with 5.3 per cent of the class B shares, and BlackRock, with a similar amount, were not known Monday. Many of the smaller funds have said they will vote in favour of splitting Teck. Whether their support will be enough to reach two-thirds approval without CIC on their side is an open question. Complicating matters for Teck is that two firms that advise passive funds, ISS and Glass Lewis, have recommended that shareholders reject the proposal. They can probably influence about 10 per cent of the class B votes.
The other question is voter turnout. Typically, only about 70 per cent of eligible votes are cast in these situations. A lower turnout means a lower percentage of the votes would be required to kill Teck’s proposal. If the turnout is, say, 60 per cent, only one-third of those votes, or 20 per cent, would be enough to make Teck miserable.
Were the proposal to fail partly because of low voter turnout, Glencore has stated it would be open to improving its merger offer if the Teck board were open to the idea. If it does, a bidding war for Teck would not be out of the question. All the heavyweight mining companies are keen on energy-transition metals such as copper, cobalt and nickel, and Teck is loaded with copper.
With only two days to go before the shareholder vote, the outcome of Teck’s effort to reinvent itself appears in the balance. It is little exaggeration to say that Beijing may make the call to keep Teck “Canadian” or throw it to the wolves.
Eric Reguly