Teck’s spun-off Canadian coal company would be a sitting duck for a foreign takeover

The pure coal company that Vancouver’s Teck Resources Ltd. TECK-B-T plans to create will likely land in the hands of predatory foreign investors, delivering a blow to Teck’s efforts to keep those assets under full Canadian control, the chief executive officer of Switzerland’s Glencore PLC GLNCY says.

In an exclusive interview with The Globe and Mail on Tuesday, Gary Nagle said he is aware of several investors who are eyeing Elk Valley Resources, the coal company that Teck plans to form through a spinoff, all of them foreign.

“There is a strong possibility that someone in the coal industry will acquire Elk Valley on the cheap,” he said, referring to Glencore’s belief that the company would trade at a low value because it would pay most of its cash flow to Teck Metals, as the new coal-free Teck would be called. “There is a high risk that Teck Metals would not see all the cash flow payments from Elk Valley as the new owners would find ways around this by being opportunistic.”

Mr. Nagle’s comments came as Glencore’s takeover battle for Teck turned nasty, with Teck on Monday highlighting the more than US$1-billion in penalties paid last year by the Swiss commodities giant to the U.S. Department of Justice and various other regulatory authorities to settle bribery and market manipulations investigations. Senior insiders at Teck and Glencore said it appeared that both companies were now on the “warpath.”

Glencore on Tuesday intensified its bid for Teck by adding billions of dollars in lieu of stock, but Teck doesn’t appear to be open to the proposal. The sweetened offer came one day after Teck comprehensively rejected Glencore’s proposal to merge with Teck and create two new companies, one that would hold their combined base metals assets, copper among them, and the other to hold their metallurgical and thermal coal operations.

Glencore’s new merger proposal would give Teck investors 24 per cent of the new metals company, plus US$8.2-billion in cash. Glencore said in a statement that it “acknowledged that certain Teck investors may prefer a full coal exit and others may not desire thermal coal exposure. Accordingly, Glencore has proposed to the Teck board to introduce a cash element … to effectively buy Teck shareholders out of their coal exposure.”

The new offer also means that Teck investors can avoid any exposure to Glencore’s thermal coal business.

While Glencore is now offering a partial cash deal, the overall value of the transaction of about US$23.1-billion is unchanged.

Teck in response said that it intends to thoroughly review the Glencore offer, but at first glance, it isn’t impressed. “Glencore’s revised proposal appears to be largely unchanged, with the exception of a cash consideration alternative in lieu of shares in the proposed combined coal entity,” Teck said in a statement. “The revised proposal does not provide an increase in the overall value to be received by Teck shareholders, or appear to address material risks previously raised.”

Mr. Nagle, who is 48 and was born in Johannesburg, called Elk Valley a “zombie” company because it would pay 90 per cent of its cash flow – through some $14-billion in dividends and royalties – to Teck Metals for about 11 years. He thinks the hefty payments could deprive Elk Valley of the ability to develop its metallurgical coal business. Metallurgical coal is used to make steel; thermal coal, which is one of Glencore’s main products, is burned to produce electricity.

He believes that any new owner of Elk Valley would be encouraged to find legal ways to shrink the payments, deliberately harming the health of Teck Metals. “A new owner of Elk Valley would not be incentivized to maximize cash flow – rather the opposite – and would look for ways reduce the payment commitment to Teck Metals,” he said.

Pierre Lassonde, the wealthy co-founder of Canada’s Franco-Nevada Corp. gold royalty company and ally of Teck’s chairman emeritus, Norman B. Keevil, said he is aware that Elk Valley would be vulnerable to a takeover if the Teck’s spinoff proposal, which goes to a shareholder vote on April 26, is approved. If the spinoff succeeds, Elk Valley would begin trading on the TSX on June 6.

In an interview last week, Mr. Lassonde said that he and a small group of Canadian co-investors were planning to buy a blocking stake in Teck’s spinoff coal company to ensure it stays in Canadian hands. His goal is to collect commitments to buy about $300-million worth of Elk Valley shares, potentially giving the group as much as a 20 per cent stake.

“I would love to own up to 20 per cent of Elk Valley,” Mr. Lassonde said. “It will be a Canadian mining giant and should absolutely stay in Canadian hands.”

RBC Capital Markets analyst Tyler Broda wrote in a note Tuesday that Glencore’s new offer “helps to address some of the key points of the Teck management pushback,” most notably the continuing exposure to thermal coal. He expects some of the B shareholders to pressure Teck’s management into engaging with Glencore.

Mr. Nagle will arrive on Toronto on Wednesday evening to meet with Teck shareholders Thursday and Friday to try to convince them that Glencore’s proposal would generate more value than Teck’s spinoff plan. He also hopes to meet with Teck CEO Jonathan Price, who lives in London and is expected to be in Toronto Wednesday.

Mr. Nagle will also use his time in Canada to tell investors and the media that he is serious about maintaining Teck’s Canadian presence if the Teck-Glencore merger were to happen. He dismissed speculation that Glencore would turn Teck Metals into a branch plant run from Switzerland, noting his company kept Viterra Inc., its Canadian agricultural business, intact with its Canadian head office in Regina, though the CEO is based in Rotterdam.

“The Viterra brand has remained and we are supporting its expansion plan, including building a seed-crushing plant in Saskatchewan” he said. “Glencore has 9,000 employees in Canada.”

The new metals company, which Glencore would call GlenTeck, would run its global mining operations from Toronto or Vancouver, though Mr. Nagle, its proposed CEO, would continue to live in Switzerland, where the head office would be expected to remain. Teck would be given the right to appoint the new coal company CEO. This scenario would also see the Glencore name cease to exist.

So far, Teck has refused to engage with Glencore in any meaningful fashion. Several analysts had expected Glencore to increase its bid as a tactic to try to win over Teck’s Class B shareholders. But at least one major holder of the B shares has already indicated that tactic would not work.

Teddy Molson, partner with U.K.-based Egerton Capital, which holds 11.4 million B shares, said Monday he intends to vote for Teck’s split regardless of how high Glencore bids. He told The Globe that Teck postsplit would be a far more attractive takeover candidate to a much larger field of potential acquirers. It would be foolhardy to entertain offers for Teck in its current format, because apart from Glencore, there are really no other companies that are interested in acquiring a business that is so heavily weighted toward coal, he said.

Christopher LaFemina, analyst with Jefferies, wrote in a note to clients that the latest proposal from Glencore is unlikely to win over the B-shareholders. “The premium offered so far is not high enough to get strong support,” he wrote.

Teck had harshly criticized the creation of a coal company that would be dominated by Glencore’s thermal coal operations.

Thermal coal is considered one of the main causes of global warming and many pension and sovereign wealth funds are shedding their exposure to the fuel. Metallurgical coal is considered more environmentally friendly because it is used to make steel products, such as wind vanes, necessary for the energy transition.

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