Teck and Glencore dispute investor appetite for coal

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Two of the world’s biggest mining companies – Glencore PLC GLNCY and Teck Resources Ltd. TECK-B-T – are putting two very different spins on the market’s appetite for coal.

To drum up investor support for a merger of the companies, Glencore chief executive officer Gary Nagle is pushing the prospects of the massive thermal coal producer he plans to create after combining forces with Teck.

In a mining industry that worships scale, Mr. Nagle is talking about spinning out a monster. Marrying up Teck mines in Canada with Glencore properties in Australia, South Africa and Colombia would generate US$16-billion annually in earnings before interest, taxes, depreciation and amortization. To put that number in perspective, it’s more than the combined EBITDA of every other publicly traded, pure-play coal producer on the planet.

To kill support for Glencore’s overtures, Teck CEO Jonathan Price staged an event on Monday to explain why not all coal is created equal, in the minds of investors.

There’s “no market” among investors for a public company that combines Glencore’s thermal coal – burned to generate electricity – with Teck’s steel-making coal business, Mr. Price said. He called Glencore’s marriage proposal a “complete non-starter” and urged shareholders to support Teck’s plan to spin out its steel-making coal mines in a vote scheduled for April 26.

Which CEO has the right read on investors? That’s easy. It’s Teck’s Mr. Price.

In an era when climate change and carbon emissions are top of mind with institutions, and a huge swath of individual investors, many of Glencore’s major shareholders could not own the coal company Mr. Nagle plans to create.

Teck Resources CEO opens the door to acquisition once split is approved

BlackRock Inc. BLK-N and Fidelity Investments – two of the six largest Glencore shareholders – are publicly committed to dumping their stakes in thermal coal producers by 2030. “Thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts,” BlackRock said in a recent report. “With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector.”

If Teck merged with Glencore, its shareholders would likely end up owning a coal stock that trades at rock-bottom valuations.

Institutions have a very different take on steel-making coal, which the industry successfully portrays as essential to the energy transition. BlackRock and Fidelity are among Teck’s largest shareholders, and can own its collection of British Columbia-based mines, which will be branded as Elk Valley Resources Ltd.

Politicians with solid environmental credentials also understand the nuance: B.C.’s former NDP premier John Horgan is joining the Elk Valley board. Two of Teck’s biggest customers – Japan’s Nippon Steel Corp. and South Korea’s POSCO – gave the spinout plan their seal of approval by agreeing to become significant shareholders in Elk Valley.

The steel makers are buying in at a valuation far higher than what investors pay for thermal coal stocks. And Nippon has publicly stated that, over time, it intends to buy more Elk Valley shares.

Glencore’s decision to go public with its offer for Teck, knowing the company’s board and controlling shareholder had already turned down its bid, speaks to the challenge facing Mr. Nagle, who ran the coal division prior to being named CEO two years ago.

The Swiss miner relies on thermal coal for a significant portion of its profit and cash, a business mix that weighs heavily on Glencore’s stock price. After years of resisting calls to spin out the business, Glencore has now revealed it is willing to break up the company.

Doing so after merging with Teck would have made the bust-up more palatable, by combining two strong base metal miners, and adding steel-making coal to Glencore’s least-loved business. Teck’s refusal to do a deal leaves Mr. Nagle in a box: What does he do with a coal business no one wants?