In today’s episode, “Teck approached by Vale, Anglo American and Freeport to explore deals after planned split, sources say“, in addition to the controlling Class A shareholder releasing a carefully fine-tuned statement to keeping all doors open.
Glencore’s 7.78 shares per Teck Class B share is currently worth about CAD$63 on the market, while Teck shares are trading slightly above this.
What is a potential paper napkin valuation?
Freeport McMoran in 2022 posted an EBITDA of $9.3 billion and sports an enterprise value of US$74 billion, or about an 8x multiple.
Teck in 2022 posted an EBITDA of CAD$10.2 billion, consisting of $1.84 billion on Copper, $1.04 billion on Zinc, and $7.36 billion on coal.
Arbitrarily giving a 8x valuation on copper and zinc, and a 2x valuation on coal (looking at ARCH as a comparator here), gives an EV of CAD$38 billion. Teck’s EV today is about CAD$40 billion.
However, this does not include the impact of Teck’s 70% ownership of the QB2 project coming online, which will fully add a huge amount of contribution margin.
The economics are mostly intact from the 2018 business case, short of copper costs projected to increase from US$1.30/pound to US$1.50/pound in 2024.
The contribution at US$4.00/pound copper is expected to be around CAD$2.2 billion EBITDA at 100% project basis – or about CAD$1.5 billion at 70%. Add in the increased costs and let’s say it levels off at around CAD$1.3 billion.
Add $1.3 billion at 8x and you get another $10 billion added to the EV, or about a CAD$48 billion bid. It’s around CAD$75/share.
There is plenty of wiggle room from the current market price of CAD$65.
One is that coal is undervalued at 2x EBITDA. While it is being discussed as the throwaway asset, it obviously is generating a ton of cash at present. While met coal prices have tapered considerably since 2022, it is still a wildly profitable asset – it is more likely that the operation will be given a higher multiple as the commodity price decreases.
Another is the valuation of the mining reserve pipeline. QB2, for instance, has a huge reserve.
Obviously Teck will want to make its acquisition as expensive as possible. I’m guessing around CAD$70-75 and something gets done.