Glencore CEO confident bid for Teck Resources still has chance after Bay Street lobbying blitz

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Glencore Plc chief executive Gary Nagle said he believes Teck Resources Ltd.‘s shareholders will vote to reject management’s plan to separate the company’s coal assets from its copper and zinc assets, suggesting the Swiss commodities giant will continue its pursuit of one of Canada’s biggest miners. 

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“Their feedback to us is the way they can get Teck to engage with us and hopefully move to a (merger) transaction (with Glencore) is to vote down this spin out,” said Nagle, who spent several days in Toronto pitching his US$23.2 billion takeover plan to Bay Street investors. 

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The Glencore proposal would leave Teck shareholders with only a 24 per cent stake in the combined company, although they would have exposure to mining colossus that might be able to take advantage of scale to earn them a greater return. For now, the discussion is moot, because Teck’s board of directors unanimously rejected Glencore’s two proposals, saying the existing plan to split up its assets would ultimately create more value. 

Nagle’s interpretation of his meetings could be wishful thinking. Teck’s chief executive Jonathan Price also spent the past few days in Toronto, although the two mining bosses say they never crossed paths. Price said in a statement that he was “confident” Teck’s shareholders will vote on April 26 to support his plan to split up the company.

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So far, Teck’s class A shareholders — whose shares carry 100 votes apiece compared with one vote for each class B share — have voiced only opposition to Glencore’s bid. They largely control the situation through their large voting position. 

But the class A shareholders don’t control the April 26 vote on whether to give Price a green light to place Teck’s coal business in a company that would send roughly 90 per cent of its free cash flow to an outfit called Teck Metals, which will need help getting off the ground. 

Price’s plan needs approval from two-thirds of both class A and class B shareholders to go ahead. 

Bigger than Glencore and Teck

Whatever happens next is more than inside baseball at Teck: the jockeying between Nagle and Price also has important lessons about the pace of the energy transition. As two of the largest mining companies in the world, Glencore and Teck have starkly different ideas about how to maximize the value of Teck’s assets, including the role that thermal and metallurgical coal will play over the next few decades. 

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“Our climate change strategy is to responsibly run down our coal mines,” Nagle said April 14 at Glencore’s Toronto office on the 69th floor of a downtown skyscraper. By 2035, he said Glencore plans to have used up 50 per cent of its thermal coal assets. 

“Look how profitable coal’s been” for both Teck and Glencore over the past year, said Nagle. “Look how important coal has been for the world — Europe imported nearly double the amount of steam coal in 2022 that it did in 2021.”

But some of the world’s other large mining companies, including Rio Tinto Ltd., have sold their coal businesses — to Glencore in some instances. Nagle, however, said that selling coal assets was irresponsible because the new owner might not manage it responsibly and could even decide to expand production. “Our shareholders are telling us they want coal to stay in the business,” said Nagle. 

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That contrasts with Teck’s approach to fossil fuels. In February, it completed the sale of its stake in the oilsands for $1 billion. It still produces steelmaking coal, which is different than thermal coal in that it is still necessary to make steel. That business segment has been extremely profitable for Teck: in the fourth quarter of 2022, gross profits increased 42 per cent and accounted for 73 per cent of the company’s total profits.

But Price is pitching investors on the idea that Teck could be a green metals company by using its coal profits to fund growth in copper and zinc, key metals for electrification. Because of the growth expected in copper, Price told investors he believes that once Teck becomes a “pure play” copper company, it likely will be re-rated by analysts, which could result in a higher share price.

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Inconsistent with climate change

That’s why merging with Teck just before it separates copper from coal would be a mistake, Price argues. He also has said that Glencore’s thermal coal plan is not consistent with fighting climate change. The International Energy Agency estimates coal combustion is responsible for nearly a third of the rise in global average temperatures above pre-industrial levels.

Under Price’s plan, shareholders would receive shares in both the copper and the coal companies, and could then sell at any time. The steelmaking coal company would pay its free cash flow out to the copper company for a period of three years or until it paid out $7 billion — whichever comes later.

“We have two different commodity outlooks,” Price told the Financial Post on April 10. “We have different business strategies, and we have different shareholder return profiles and therefore we are providing our investors with choice as to which of those shareholder return profiles they prefer for their portfolios.”

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By contrast, Nagle said that he wished he could “shut every coal mine as soon as possible.” Shareholders would win either way, because demand for copper would presumably increase if coal ceased to be part of the world’s energy mix, and Glencore also mines and sells copper.

“It’s the responsible thing to do, but it’s not going to happen,” Nagle said. “It can’t happen now” because the supply of metals such as copper aren’t robust enough to offset all the energy that would be lost by eliminating coal now, he said. 

In this context, Nagle said Glencore has no reason to break up the company. However, he said Glencore also would separate coal from copper to conform with Teck’s plans. 

That would be complicated by the fact that some shareholders are institutional investors that have committed to shun companies involved in coal. For that reason, Nagle said Glencore updated its merger proposal so any Teck investors who did not want to own shares in a pure-play coal company could opt for a cash payment. 

Ultimately, Nagle said, his investors want Glencore to hold coal and they control the shots.

The question is what Teck shareholders want? A Glencore merger would increase their exposure to coal whereas proceeding with the split would provide a path to eliminating their exposure to coal.

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