A sign at the Teck Resources booth at the Prospectors and Developers Association of Canada annual conference, in Toronto, on March 7.CHRIS HELGREN/Reuters
The Phoney War was the period early in the Second World War, when there were few battles on the Western Front. The relative calm ended when Germany invaded France in the spring of 1940.
The battle for Teck Resources TECK-B-T, Canada’s biggest diversified mining company, is definitely in the phoney war stage. After a raucous start, a whole lot of nothing has happened for weeks in the campaign that will ultimately determine the shape of Canada’s base metals industry. There are signs that a renewed assault on Teck could start soon, one that will make or break the effort by Switzerland’s Glencore to make Teck its own as it strives to become one of the world’s top producers of the metals needed to propel the green energy revolution.
It may not work in Glencore’s favour. There are few signs that Norman B. Keevil, the Teck chairman emeritus who controls the supervoting Class A shares with ally Sumitomo of Japan, is willing to hand his broken-fingernail, ore-body finding legacy to Glencore. And there are a lot of signs that Ottawa would not approve the takeover of one of the few big domestic mining players left standing after almost two decades of foreign takeovers that hollowed out the Canadian mining industry.
The battle for Teck, whose main products are copper, zinc and coal, began at the start of April, when Glencore launched an unsolicited, all-share offer for the Vancouver company valued at about US$23-billion. Teck rejected the pitch as a non-starter; ditto a revamped offer that included a cash component. Glencore’s plan was to merge its ample metals operations, including its Canadian nickel operations, with those of Teck, creating a copper, nickel and cobalt giant to feed companies such as electric-vehicle king Tesla, then create a separate company that would hold the two companies’ coal businesses.
Nice idea – pity about Teck’s independence streak. Teck was bent on pursuing its own strategy, which would see it spin off its metallurgical (steelmaking) coal division. But the proposed deal was messy, since it was not a true spinoff. The coal company, Elk Valley Resources, would have paid most of its cash flow to Teck for about a decade, leaving Elk Valley a cash-starved “zombie” company – the description used by Glencore CEO Gary Nagle.
No surprise that Teck could not find enough shareholder support to win the April vote to approve the spinoff. The result is that today, Teck, for all the headlines it has generated over the past three months, for all the gnashing of executive teeth, is unchanged. It is still a base metals company with an enormous – and grubby – coal division at its side. To fulfill its dream of becoming a world-class “critical” metals company, it will have to ditch coal. But how?
In a market dominated by environmental, social and governance (ESG) investing standards, there is no love for coal of any description, whether it is used to make steel or generate electricity. That means Teck would have trouble selling its coal business to anyone but Glencore, one of the few mining biggies – maybe the only mining biggie – willing to stuff more concentrated carbon into its portfolio.
Since Teck has no interest in dealing with Glencore, and doesn’t need all the US$8-billion or so value of the coal business up front, it will no doubt try to sell a minority stake and store the rest for “optionality” – corporate argot for keeping the door open for another deal to bring in more cash when needed. Pierre Lassonde, co-founder of Canada’s Franco-Nevada gold royalty company, is assembling a group of investors willing to buy a stake in Teck’s coal business. The stake could go out the door fast since Teck would not need shareholder approval to unload it.
Glencore’s quiet phase could be a ruse. Mr. Nagle has said several times that Glencore is willing to improve its offer for the Class A shares and the single-vote Class B shares, which represent most of the equity. A new offer seems inevitable and could land within weeks, if only because Glencore, the world’s biggest commodities trader and one of the biggest mining companies, has never shied away from a good fight, even when the odds were against it.
The bid would have to come with a fat top-up, since Glencore shares have declined since early April, shrinking its opening premium. A 30-per-cent bump might appeal to the greed of Class B shareholders, many of them quick-buck hedge funds that would put pressure on the Teck board and Mr. Keevil to crack the door open to Glencore.
For Glencore, it is a gamble worth taking because greed more often than not determines the outcome of takeover battles. But this story was never purely about raw shareholder returns. It was about Teck’s desire to turn itself into a metals champion and stay Canadian along the way – and Ottawa’s desire to avoid seeing another big mining company, especially one that produces a critical metal such as copper, walk to the border and wave goodbye. Glencore’s merger proposal makes sense on many levels. If it loses, it will lose to a resurgent Canadian nationalism that a high price and strategic logic could not overcome.