Glencore: Proposed Teck merger and coal demerger
What the heck is a “demerger”? Rhetorical question.
I see two events going on here. The very public event is the following slide on copper:
Glencore makes a case that there is a strategic synergy to utilizing QB2 facilities to improve efficiencies on its own project (Collahuasi), which you can see on a map are relatively close together:
It is a geographical advantage that the others (specifically BHP) does not have.
But really, this merger is all about coal.
With Teck, Glencore picks up 10 million tons a year of production and this will nearly double its Canadian production.
When working in its entire base of met and thermal operations, if you believe the slide deck, it will generate CAD$14 billion pre-tax cash. Needless to say, this would be a lot of money.
At Glencore’s stock price of about $7.60/share, it prices Teck (Class B) at around CAD$59/share. Notably this is below 10x analyst forward estimates, but given that most of the Capex has already been spent on QB2, Teck’s future free cash flows will be immensely higher in the future.
Thus, the price has to go higher. In addition, after the coal spinoff was announced, the market had Teck go up to around $62/share and I think that will be a psychological anchor point as a minimum.
Because Teck has a dual class structure, there is some inside baseball going on with the Class A shares. It could be possible they will be offered a sweetened deal, especially to the exclusion of Class B shareholders, and eventually agree to it.
There are cases where you hit the sell button after a proposed takeout offer. There are times where you hold on and wait for a better offer. The latter is likely the case.
I’m guessing a deal gets done in the mid to upper 60’s.
If not, there’s a ton of cash flow to be distributed in the future, especially with the Elk Valley spinout – will be interesting to see how much the market puts a price on political correctness.
After that, however, will be a regulatory nightmare that will make Shaw and Rogers look simple.