After two decades of evisceration, the Canadian diversified mining industry had one big name standing – Teck Resources TECK-B-T. The company was not among the half-dozen giants that dominate the global mining industry, but it was the biggest we had left. With a smart strategy, disciplined spending and more than a little luck, Teck could emerge as a homegrown champion, perhaps not among the industry’s A-team players, but near the top end of the B list.
That was the vision, at least. What happened instead was self-evisceration. On Nov. 14, Teck sold its vast coal assets, all of them in Canada, to Glencore of Switzerland, Japan’s Nippon Steel and South Korea’s POSCO, in an US$8.9-billion deal.
The sale of Teck’s coal made sense on one level, perhaps, and no sense on others.
Coal is the most carbon-intensive fuel, making it an energy pariah, though still a popular one. Some disciples of ESG (environmental, social and governance) investing principles will be happy to see the grubby fuel shown the door. But Teck’s coal was not the thermal variety that is burned to generate electricity. It was metallurgical coal, which is used to make steel.
As such, it was pretty much given a free ride among much of the ESG crowd. To banish metallurgical coal from the market would be to banish steel production, and no one is calling for that. Steel is needed to make electric cars, wind vanes, solar panels, trains, rail tracks, bridges and a million products essential to everyday life. Eventually, a cheap, clean fuel will come along that will replace coal in steel making, but that may not happen for decades.
That’s point one. Point two is that Teck’s coal division, known as Elk Valley Resources (EVR), was an enormous and financially vital part of the overall business, and had made the company the world’s second-largest exporter of seaborne metallurgical coal. Last year, coal accounted for 60 per cent of Teck’s revenue and 75 per cent of its profits. In other words, EVR could support Teck’s expensive transition into the burgeoning critical-metals industry, with a concentration on copper. So why sell it? Was it to placate the investors who could not tell the difference between thermal and metallurgical coal?
Given the long life and the high quality of the coal resource in the four operating EVR mines, the hefty financial contribution was not set to vanish any time soon. Indeed, Teck’s recent EVR literature was full of superlatives. The coal asset was “world class” that came with a “waterfall” of cash flow that produced “high-margin” profits; the coal mines’ lives were “30+” years. Besides all those attributes, Teck’s “coal is optimally positioned for a decarbonization future.”
All in all, Teck was to be transformed for the better by coal, whose biggest expansion came in 2008, when the company bought Fording Coal. At the time, Norman Keevil, the then chairman, now chairman emeritus, said “the coal operations involved are world class and will be important to the world steel industry and to Teck for decades to come.”
Point three is that EVR gave Teck an anchor in Canada. Most of its other assets are outside of Canada – copper in Chile at the enormous (and way over budget) QB2 mine, and zinc in Alaska at the Red Dog mine. It was EVR that gave Teck its true Canadian-ness, plus the ability to exercise effectively full control over that asset. The copper operations in Chile and Peru, in particular, are riskier in that the local and national governments can change the terms of ownership, such as the tax, royalty and employment structures, pretty much on a whim.
Which brings us to the last point. Will the Canadian government shield Teck from foreign buyers with coal gone and most remaining assets beyond Canada?
The general belief is that Ottawa will approve the sale of Teck’s coal to Glencore, since coal is not a “critical” resource as, say, copper, nickel and cobalt are for the transition to a low-carbon future. The belief is also that Ottawa would never approve the sale of Teck as it evolves into a significant copper producer. Various big-name politicians have talked about the need to keep Teck “Canadian” in a land of foreign-controlled mining companies.
But will they stand in the way if a fat-premium takeover offer comes along? Politicians say one thing and do another. Protecting a shrunken company with few assets in Canada may not be a priority in a few years for whoever is in power then. And Teck, in spite of its touted pipeline of copper projects, may get smaller still. Already, there is talk of Teck combining its QB2 mine in northern Chile with that of the nearby Collahuasi mine, which is owned by Glencore, Anglo American and Japan Collahuasi Resources.
The idea – a sensible one – would be to feed Collahuasi’s high-grade copper into QB2′s mill, and save a fortune on joint logistical operations. If it happens, a new company might be formed that would own both mines, with Teck emerging as a minority partner in the enlarged operation.
Would Ottawa block the sale of a Teck shorn of its main Canadian asset (coal) and control of its main copper business (QB2)? Maybe not. Teck was better off as a bigger company with the all-Canadian ESG-correct metallurgical coal at its side. As the opportunistic and unforgiving mining world has shown, only the biggest companies survive and thrive.
Eric Reguly