Canada’s largest mining company, Teck Resources Ltd. (TECK, Financial), is primarily known for its steelmaking coal business, which made up a little over half of its revenue and 73% of its gross profit for the fourth quarter of 2022. However, it also has a substantial copper mining business and a small zinc operation as well. The metals business has attracted more than six offers as investments in electric vehicles and other technologies ramp up, driving an expectation of long-term sustained demand growth for the red metal.
As the outlooks for the coal and metals businesses have diverged, Teck is looking to unlock shareholder value by splitting the company into two different parts. It expects the separation to be completed in May as long as shareholders vote to approve it.
A possible wrench in the plan could occur if shareholders vote on an unsolicited acquisition bid from Swiss commodities giant Glencore PLC (GLCNF, Financial). If Glencore is willing to raise its offer high enough, it could potentially be more valuable to shareholders than the planned business split, though whether shareholders would bite is another question.
Regardless of whether Teck goes through with its planned separation before fielding offers or goes ahead and accepts an offer from Glencore, the jockeying for its assets and its low valuation compared to copper-heavy stocks shows the company could unlock significant shareholder value in the upcoming months.
Copper mines in high demand
Teck’s metals business is primarily focused on copper mining. There are not many big pure-play copper stocks on the market, as most are tied up with other metals, but two stocks that stand out as mostly copper-focused are Freeport-McMoRan (FCX, Financial) and Southern Copper Corp. (SCCO, Financial), both of which trade at price-earnings ratios in the low 20s range compared to Teck’s price-earnings ratio of 9.52. Thus, it is clear that the coal business is serving to hold back the company’s valuation.
The metals industry is highly cyclical, and copper is no exception because supply growing faster than demand can still cause a hit to prices even if demand is in a long-term growth trend. However, copper is an essential component of electrification. If the world is going to meet goals of switching to renewable energy, repairing and building electricity capacity and other technology trends, McKinsey & Company estimates that annual copper demand could reach 36.6 million metric tons by 2031, meaning the industry is short 6.5 million metric tons of capacity as of February 2023.
The strong outlook for copper combined with the fact that many mining companies are flush with cash following high commodity prices over the past few years means there has been an uptick in interest for M&A activity, especially for attractive copper assets.
According to Reuters, Teck has received more than six offers for its base metals business provided that it goes through with its business separation. Suitors include Freeport-MoMoRan, Vale SA (VALE, Financial) and Anglo American PLC (NGLOY, Financial).
Metallurgical coal outlook
Metallurgical coal is a component used in steelmaking that currently has few viable alternatives, especially at scale. Hydrogen is one of those alternatives, so in theory, someday hydrogen produced with renewable energy could serve as a completely clean replacement to metallurgical coal. The downside is that any renewable energy that goes toward producing hydrogen is renewable energy that is not being used for much more energy-efficient applications, such as residential electricity.
Thus, while hydrogen produced with renewable energy should someday theoretically replace metallurgical coal in the steel production process, the bulk of this transition will likely occur toward the end of the clean energy transition. Even the more optimistic estimates tend to place net-zero at around 2050 or later. Even though it is technically feasible to reach net-zero before then, there are still too many fortunes tied up with oil and gas for that to become a uniform government priority in most countries.
In the meantime, metallurgical coal will likely remain a highly cyclical industry in the absence of a long-term growth trend like copper. On the bright side, assuming Teck’s metals business could fetch a similar valuation to other top copper-heavy miners, its metallurgical coal business is basically a free add-on that can still bring in revenue for years to come.
Is a Glencore deal possible?
Most of the M&A interest in Teck is focused on its metals business post-separation, but there is one notable exception. Glencore wants to acquire the entire business so that it can rid itself of its thermal coal operations, creating both a metals company and a coal company from Glencore and Teck’s businesses.
Teck’s board has rejected Glencore’s original $22.5 billion all-stock offer on the grounds that it is too low and that it would also expose its investors to Glencore’s thermal coal and oil trading operations. Teck values its metals business alone at around the same level as its current market cap of $23.78 billion, so the rejection comes as no surprise. Glencore would have to sweeten the deal considerably in order to get Teck’s shareholders to even consider it.
It did just that on April 11, when it tacked on $8.2 billion in cash to the offering. Getting Teck’s shareholders on board is a tough hurdle to clear, though, because Canada's Keevil family owns the majority of the company’s Class A shares, giving it a controlling interest. The head of the family, Norman Keevil, has said that he is firmly against the Glencore deal, so if Glencore wants the business, it will likely have to wait until after the separation to come to the negotiation table, unless Keevil changes his mind.
Takeaway
The copper industry enjoys a long-term growth tailwind and significant M&A interest, while the metallurgical coal industry is a low-growth cyclical at best and should eventually be phased out in the later part of the next few decades once the renewable energy transition nears net-zero. Teck Resources plans to take full advantage of this disparity to separate into two businesses, metals and coal, estimating that its copper-dominant metals business alone could be worth as much as its entire market cap if it were to trade at the same valuation multiples as other major copper-heavy mining stocks.
On top of that, multiple companies have expressed their interest in acquiring the metals business after the separation, and Teck says it is willing to come to the negotiation table after its shareholder value creation move comes to fruition. Overall, it looks like the stock could soon become a good bargain.
