Tag: TECK

Teck announced today that Industry Canada approved the merger between Teck and Anglo American. This cleared one of the most significant regulatory hurdles to the merger and basically clears the way for the merger to proceed sometime in 2026.

The last trading price of Anglo American and Teck was at a -17.7% merger arbitrage spread at the 1.3301 share conversion factor. This will most likely converge to a single digit number and close to zero as the hurdles clear.

It pretty much will be a matter of valuation at this point. The 437 page management information circular gives some hints on how to approach this, but given how both companies have various write-downs on income, the net income pro-forma is not useful for analytical purposes.

The combined entity will have approximately 1.94 billion shares outstanding, diluted.

The balance sheet, after Anglo shareholders receive their one-shot dividend to strip Teck’s cash, will have a negative net cash position of about US$18 billion.

At US$38.14 per Anglo share, this gives them a market cap of US$74 billion or an EV of about US$92 billion.

Looking at Anglo, we have an entity with US$6.4 billion in operating cash flow in the trailing 12 months. If you include Capex, the free cash flow is about US$1.4 billion. The commodity environment going forward should be a bit more favourable than those numbers.

We have Teck, with LTM operating cash flow of US$1.1 billion and Capex of US$1.3 billion as they try to figure out how to run QB2 efficiently.

It doesn’t take a CFA to figure out that the promise of this combined entity will rely on increased commodity prices, an element of balance sheet value (i.e. the reserves they are dredging out of the ground) and moderating capital expenditures (yeah right!).

These mega-mergers always take a ton of time to figure out as there will inevitably be huge cultural clashes, not to mention figuring out how to fix QB2 and realize “synergies” in that mining operation.

Teck was one of my Covid trades and they have gone through a lot since then – selling Fort Hills (an oil sands project that Suncor is now taking great advantage of), selling their metallurgical coal operations in Elk Valley (to Glencore), and now selling the the rest of it. They are going out at nearly all-time highs and so will I with the rest of this trade. I have zero interest owning the merged entity.

Less than two months after I wrote about Teck, they have agreed to a so-called “merger of equals” (not! – Anglo will have 62%, Teck 38%, and that is after a US$4.5 billion asset strip!) where Anglo American would take out Teck in a stock swap – Teck holders will receive 1.3301 shares of Anglo American.

The other salient term is that Anglo will also take out US$4.5 billion cash before proceeding with the merger – which is a pretty big way of effectively extracting the remaining equity out of the Teck operation and leveraging the crap out of it! Teck is still relatively under-levered by virtue of selling their coal mining operation (having blown a serious amount of this cash on a buyback at higher stock prices than today). But none of this will matter for Teck shareholders anymore as they will be gone!

The big opportunity here are for so-called synergies (which take a much longer time to materialize, if at all, in these mega-mergers) but there is some basis for finding synergies with Teck’s QB2 project and the Collahuasi mine, which is 44% owned by Anglo and 44% by… Glencore. Collahuasi is about 15 kilometers away from QB2 and there is potential for some engineering synergies to be realized to combining assets, but first Teck has to get its own crap together on QB2!

Anglo, pre-merger, is involved in copper (28% of revenues), Iron (24%), Platinum (22%), the infamous De Beers (yes, the diamond cartel, 12%) and Metallurgical Coal (13%).

Ironically De Beers is the only significant business unit that is not making money for the company at present. Perhaps diamonds are not forever!

Skimming the Anglo financial statements, it is not a company that I want to be holding for very long. It is completely outside of my desired investment profile. All of these synergistic promises will take a ton of time to materialize. The forced internationalization and geographical diversification of executives and staff sounds like a total nightmare to manage. I also don’t want to have to care what’s going on in South Africa – my investment in First Uranium sufficiently traumatized me.

However, I think the institutional money will love it. I actually think there is enough pro-Canada material in there for them to get the stealthy “Canada is open to foreign investment” nod of government approval.

Before thinking there will be a superior counter-proposal, the only logical other suitor out there for Teck was Glencore. After the sale of the coal unit to them, this is simply not happening. The deal should be a done deal. If only Cenovus, Strathcona and MEG Energy was as clear!

Finally, part of the deal was them changing their name from “Anglo American” to “Anglo Teck”. It looks like they were really eager to shed the “American” part of their name and needed an excuse!

I’ll be looking to divest my remaining small stake in Teck, but I am not in any rush. Commodities are skyrocketing (monetary debasement is a very powerful force) and even though it looks like that Anglo American is doing just as bad a job of cost containment as Teck, in a rising price environment they won’t be crashing down anytime soon.

Apparently the merger is expected to take 12-18 months and so this is not to be a case of selling on the first day – there will be a link going forward to Anglo’s common stock and my paper napkin adjusted income has them trading at around a P/E of 14. It’s not as if Microstrategy did a stock swap for them.

I originally acquired a substantial stake in Teck a couple months after everything hit the fan in the 2020 Covid shutdown. About 2/3rds of it was eliminated in 2024 for an average of $66/share. It looks like there will be another opportunity to disposing of the rest soon enough. Needless to say, the market timing has been borderline perfect – it rarely works this way!

Previous edition (Round 3).

On April 26, 2023, Teck had to tuck in its tail and announce that the division between its mining and coal units would be postponed and that the board would consider a more simplified option. They could not get a 2/3rds majority vote.

Today, we have news that a Canadian mining titan, Pierre Lassonde, is interested in purchasing the coal mining unit of Teck for an undisclosed price.

This isn’t exactly a known secret – there was an article just a month ago about this.

My guess is that this is just media-baiting to facilitate more selling of the stock.

Price is everything. Using an unlevered 2x/EBITDA (which would be a price that clearly anybody would salivate getting a relatively stable business for), the coal unit would fetch a pre-tax $15 billion, or just under half of Teck’s market cap.

Perhaps the scheme is to put up $5 billion in equity, and borrow $10 billion (half of it can be a flat-out debt offering, and the other $5 billion can be functionally borrowed from Teck in exchange for a 5-10% perpetual revenue royalty or some other form of financial engineering), and suddenly you have the makings of a very asymmetric transaction – on the buy-side, your ROE will be insanely huge, while on the sell-side, Teck hopes to receive a re-rating on its stock AND retain some cash flow to fund the capital expenditures of your future copper mines. Win-win!

Glencore would surely be interested in the assets as well, but in either case, the palms of the government will have to be greased to facilitate this.

From a psychological standpoint, it feels like that the cited pipeline of physical copper shortages is reaching a feverish pitch. It is being spoken as if it is conventional wisdom, and that makes me very cautious with respect to the market.

I remember this script playing out before – Potash Corp was going to be taken over by BHP in 2010, but the government put the brakes on this in short order. A strategic difference is that Teck’s copper operations mainly lie in South America, while Potash Corp’s reserves were in Canada.

However, Teck’s coal mining operation is situated in British Columbia. Perhaps Lassonde thinks that he can obtain the assets for cheaper than Glencore via less regulatory stress.

Teck’s stock is trading at a price that it has not seen for over a decade. Teck’s history in the past has always been punctuated by massive booms and busts – with the current cycle obviously being in boom territory (fortunes were made if you got in during the busts!). While it is likely that their copper operations will make bundles of money, the question then becomes one of valuation – my deep suspicion is that this baseball game being played is down to the last three innings. I also very much doubt that shareholders are going to get an exit decided for them (i.e. I think the chances of an outright sale of the coal unit and a subsequent special dividend is next to nothing). There’s too much of a management incentive to keeping the company’s gravy train going for at least another few years.

Finally, in today’s edition of “everybody has to be a macroeconomist to invest in this market”, while all indications suggest that the economy is still humming along, commodities at the later stages of an economic cycle are the textbook asset that you don’t want to be exposed to. There are other mitigating factors (i.e. the inflation and monetary policy situation), but given the contraction of liquidity in the US (not to mention the looming debt crisis), coupled with mixed messages, makes me very defensive about matters. My crystal ball, while seeing some patches of clarity here and there, still remains considerably murky.