The Long and Short

Glencore makes a hard push for Teck Resources

| April 14, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Glencore PLC (GLENLN: Baa1/BBB+) recently revised its unsolicited offer for fellow mining operator Teck Resources (TCKBCN: Baa3/BBB-), adding a sizable cash component in hopes of gaining shareholder support, but falling short of raising the overall compensation. Teck’s board rejected the revised terms of the proposal, and amended the company’s own plans for separating out its coal operations in a spin-off to shareholders. This ramps up pressure on GLENLN to consider further sweetening the terms. The timeframe to get a deal done is short, as Teck shareholders are scheduled vote on its own separation in less than two weeks. Bonds of each issuer continue to trade in a tight band across the curve, reflecting the uncertainty of the developing scenarios. GLENLN intermediate and long-term notes still appear to offer good relative value to both Teck and the broader, diversified metals and mining segment. While some potential outcomes would be inherently negative to credit, the considerably larger and higher-rated GLENLN still offers investors a better overall outlook and prospects for long-term operating success,

Exhibit 1. GLENLN curve versus TCKBCN curve – trading in tight bandwidth despite sizable difference in underlying credit profiles

Source: SanCap, Bloomberg/TRACE BVAL indications only

GLENLN’s original, unsolicited proposal to purchase Teck resources was made public on April 3, valuing the company at just over $23 billion. Initially, investors were to receive all-stock compensation for their shares, with the intention of later combining both companies’ metallurgical coal operations and spinning them off into a new entity. After the first deal was quickly shot down by management, GLENLN revised the terms by entering an $8.2 billion cash option to shareholders. Under this revised proposal, Teck shareholders would still own about 24% of the combined metals businesses but could now opt to receive cash compensation for their 24% stake in the anticipated coal company. This week those revised terms were shot down by the board. Also, earlier in the week, the patriarch of Teck’s controlling investor, the Keevil family, stated that they would not sell at any price.

Back in February, Teck announced the long-speculated break-up of the company, which is designed to have the metallurgical coal operations spun out into a new standalone entity. Shareholders are scheduled to vote on the restructuring on April 26. The existing Teck debt will remain with the considerably smaller copper and zinc operations, to be rebranded Teck Metals and the coal operations will be branded Elk Valley Resources (EVR). The proposed restructuring originally called for free cash flow to be streamed back to the metals operations until $7 billion was to be repaid, and the rating agencies initially committed to investment grade ratings for the legacy operations. Under the new terms announced this week, Teck is reducing the minimum term of the royalty paid by EVR to Teck Metals to 3 years from over 5 years, seemingly to preserve value earlier at the entity spun off to shareholders. This new wrinkle seems to put additional uncertainty on legacy Teck Metals where the debt will remain and the streamed cash flows that would enable the issuer to reduce debt and preserve ratings.

Headquartered in Baar, Switzerland, Glencore PLC (GLENLN: Baa1/POS, BBB+/POS) is among the global leaders in mining and commodity trading. Core mining markets include copper, zinc, thermal coal, as well as ferrochrome, nickel, metallurgical coal, and cobalt. GLENLN also owns a 49% stake in Viterra giving it exposure to agricultural businesses as well. Key operations are located in Chile, Australia, Democratic Republic of Congo, South Africa, Peru, Kazakhstan and Canada. The company was largely formed through the 2013 merger of Glencore and Xstrata. GLENLN’s marketing/trading division provides diversity of earnings and a source of profitability during periods of volatile commodity prices. Metals & Mining represents about 42% of total revenue while Energy Products (coal & oil) comprise the remaining 58%, with marketing/trading activities making up about 20% of total cash flows across both platforms.

The Teck proposal does seem to change some long-held notions about GLENLN’s willingness to separate the coal operations. Management had previously held that GLENLN was capping production and running its coal assets to depletion over the next 30 years, with plans to reach net zero emissions by 2050. They had recently canceled a $1.5 billion coal project in Australia and announced plans to close 12 coal mines by 2035 both in late 2022. However, they were facing public pressure to consider alternative strategies. Activist Bluebell Capital Partners had been pushing GLENLN to spin off its coal assets, but until now management had appeared at least on the surface to be committed to running those assets to depletion over the long-term.

Nevertheless, despite the additional event risk that the proposal creates, standalone GLENLN credit still holds a major advantage over Teck, particularly with the changes to the latter’s separation plans. GLENLN maintains a very low debt burden and ample liquidity relative to maturities, both of which have earned it upward ratings trajectory. The rating agencies recently acknowledged GLENLN’s improved credit profile. S&P revised the outlook on its BBB+ rating to Positive from Stable in August 2022, reflecting record low net debt outstanding and overall tight financial policy. Moody’s also revised its outlook on the Baa1 rating to Positive from Stable in October of last year, similarly reflecting the tighter financial policy and improved credit metrics. Both agencies appear to be considering an upgrade to A-/A3 over the next several months, independent of the event risk that the ongoing scenario with Teck presents.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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