Glencore offers to buy Teck's coal business as takeover battle takes a turn

A truck hauls a load at Teck Resources’ coal operation near Sparwood, British Columbia. Photo by Teck Resources

Swiss miner Glencore PLC is in talks with Teck Resources Ltd. to buy the Canadian miner’s coal assets, both companies said on Monday, introducing a twist to a takeover saga that has dominated the global mining industry for several weeks now.

The announcement comes a week after Teck said multiple companies had sent in proposals to buy the miner’s steelmaking coal assets in British Columbia.

“Teck confirms it is engaging with Glencore around their proposal regarding the steelmaking coal business,” Teck said in a statement on June 12. “The proposal is preliminary in detail, conditional and non-binding.”

Glencore said its proposal to only acquire Teck’s coal assets does not mean it has dropped the idea to buy the Canadian miner in its entirety, something it has been attempting to do since April. Teck has rejected the Swiss miner twice so far.

If Glencore ends up buying Teck’s coal assets, it will eventually create a separate company that would include both Teck and Glencore’s thermal and steelmaking coal assets.

At a mining conference in May Glencore’s chief executive Gary Nagle said buying Teck’s coal business alone would be a “distant second in terms of potential benefits” as compared to buying the whole company.

The takeover battle between the two companies started in February when Teck said it was going to split its company and create Teck Metals, a standalone company that would focus on copper and other minerals considered key for the energy transition away from fossil fuels, and Elk Valley Resources Ltd., which would focus on coal.

The company said the move was designed to unlock more value for shareholders by creating a company for investors who want a clean break from fossil fuels.

But Teck Metals would have depended on cash flow from the coal unit for at least three years following the separation, keeping the coal and metals business intertwined and seemingly going against the proposal’s main selling point to investors.

As it stands, Teck depends on steelmaking coal for about 60 per cent of its revenue, though it has been trying to rebalance its portfolio to produce more metals.

A month later, Glencore said it wanted to take over Teck and undergo its own separation. Glencore, which posted revenue of about US$250 billion last year compared to Teck’s US$13 billion, produces an array of commodities including, gold, copper, cobalt, zinc, nickel, oil and coal.

After merging with Teck, Glencore proposed creating two companies. One would control the combined metals portfolio, and could become the world’s third-largest copper producer. The other would become a publicly-traded company focused on coal.

Glencore’s plan differs from Teck’s in that the two new companies would not depend on the other for revenue.

Glencore has also said that if Teck successfully split its company into two, it wouldn’t pursue the company since it would complicate the deal. The company took its message to Teck’s investors to influence them to vote against Teck’s separation plan in April.

Teck was forced to cancel that shareholder vote just hours before it was scheduled to take place since it didn’t expect the separation to be approved by two-thirds of its shareholders, the necessary threshold needed for the plan to go through.

The battle between the two companies has also dominated the political front with politicians urging the federal government to prevent such a deal from taking place in a bid to ensure that Teck’s copper continues to be owned by a Canadian company.

Copper is expected to play a key role in the shift away from fossil fuels given it is essential for most electricity-related infrastructure, including electric vehicles and wind turbines, and to transfer electricity. But analysts said that most big mining companies have limited growth opportunities for the red metal, which has set the tone for large-scale mergers.

Industry minister François-Philippe Champagne declined to comment on Glencore’s proposal at a press conference announcing Rio Tinto Ltd.’s $1.4 investment in an aluminum smelter in Quebec.

“I would say we are welcoming foreign investments … but in the specific case of Teck, we like them as a Canadian company,” he said.

In the past, the mayors of the towns of Sparwood and Elkford, B.C., which are near Teck’s steelmaking coal mines and supply most of Teck’s workers, have criticized the possible sale of Teck’s assets to Glencore in April.

Sparwood Mayor David Wilks said the takeover of the steelmaking coal assets by Glencore “would be devastating” since it would hurt the region’s image by connecting it to a company that’s heavily reliant on thermal coal, which is used to generate electricity, but is a major contributor of carbon emissions that pollute the environment.

Thermal coal is responsible for about 70 per cent of Glencore’s coal business. In the long run, Glencore hopes to run down its coal assets, but believes the commodity is still required as a transition fuel.

Bank of Nova Scotia analyst Orest Wowkodaw said it was unclear whether an offer for Teck’s coal segment represents a shift in Glencore’s strategy to try to acquire the whole company.

“Overall, we view the update as largely neutral for (Teck’s) shares,” he said in a note to clients on June 12. However, we would not be surprised to see the shares under some near-term pressure as some level of takeover speculation recedes on this news.”

Liam Fitzpatrick, analyst at Deutsche Bank AG, said he views Glencore’s proposal to buy Teck’s steelmaking coal as an “attractive middle ground” between the two companies.

“It would provide Teck with a cleaner exit from coal and allow Glencore to split its own business,” he said in a note to clients.