Many smart people have already written about this, and many smart people have traded this. I won’t repeat their analysis.
The key point was this line in the conference call:
Concurrent with the separation, we announced agreements with two of our steelmaking coal joint venture partners and major customers to exchange their minority interest in the Elkview and Greenhills operations or interest in EVR. Notably, Nippon Steels $1 billion cash investment implies an $11.5 billion enterprise value for our steelmaking coal assets.
Given the amount of cash the EVR spinoff is producing at current met coal prices, the EV that they gave the equity stake to is low, which is probably why they got the minority shareholders to subscribe to EVR.
I surmised in my previous post:
What you also do to complete the financial wizardry is that you load the coal operation with debt, say around $10 billion. Give it to the parent company as a dividend, or perhaps give it to shareholders as a dividend in addition to the spun-off equity and the projected return on equity will skyrocket (until the met coal commodity price goes into the tank, just like what happened two seconds after Teck closed on the Fording Coal acquisition before the economic crisis).
It turned out my $10 billion dollar figure was nearly correct, but in the form of a 60% royalty on the first $7 billion of cash, coupled with $4 billion in 6.5% mandatorily redeemable preferred shares. Instead of doing a straight debt deal, this all just goes into Teck’s bank account.
The length of the payout period depends on met coal pricing being sufficiently high – something that I don’t think can be depended on for the majority of the rest of the decade.
Quite frankly, I think they screwed it up and hence the market reaction.
Since Teck is likely to make huge positive cash flows coming forward with their copper operations, they did not need to do a cash grab on the coal operation. If the spinoff was a simple one, I think much more market value would have been assigned to the joint entities.
Also, not being given enough attention is the give-away to the Class A shareholders. This is a very rare situation where you have a dual class structure and the voting shares get a huge payoff. (Looking at Rogers’ stock here!). I will be voting against this arrangement.