Glencore’s ambitions to acquire Teck highlight how critical minerals race is fuelling consolidation in the mining sector, but responsible investors worry about thermal coal exposure.
Ongoing merger negotiations between Canadian mining company Teck and mining major Glencore reflect the increasing competition for critical minerals access, driven by growing demand for the resources needed to transition to renewable energy sources. The strategies being pursued by mining firms also pose questions for investors looking to maximise value while considering environmental risks and impacts.
Prior to its annual general meeting (AGM) on 26 April, Teck announced its intentions to split into two independent companies: Teck Metals, a producer of energy transition metals, and EVR, a pure-play steelmaking coal producer.
Teck noted the planned split recognised the “strong market support for copper and base metals driven by energy transition metal demand dynamics, perceived political and regulatory risk to the steelmaking coal assets, and evolving investor concerns regarding steelmaking coal”.
Teck Metals would depend on cash flow from EVR for at least three years following the split; with Teck currently depending on steelmaking coal for around 60% of its revenue.
However, a counterproposal has been posed by Glencore, which has offered US$23.2 billion to buy Teck and take control of the split of the business, with shareholders divided on the two proposals.
“You can either build a mine or buy a mine, but it’s becoming harder to build mines at scale,” Mila Krassiouk, Senior Portfolio Manager at investment management firm Letko Brosseau, told ESG Investor.
Letko Brosseau owns 3.7 million shares (0.7%) of Teck’s shares and publicly declared its support for its separation plan.
Krassiouk noted that the increased focus on addressing the environmental and social impacts of the mining industry, as well as the sheer expense involved in building a mine, “may tilt the balance towards buy” for larger mining companies like Glencore if M&A opportunities become available.
“Building another Teck would likely take decades,” she said.
This deal is another example of mining majors looking to acquire smaller companies to bolster their critical minerals production profiles.
Last month, gold miner Newmont Corp bid US$19.5 billion to takeover Australian gold miner Newcrest Mining, a deal which would further cement Newmont’s position as one of the largest global gold miners, while simultaneously bolstering its annual copper production with an additional 50 billion lbs of copper reserves and resources.
This week, BHP also strengthened its access to copper and nickel by completing its acquisition of OZ Minerals.
Demand for copper
The climate transition depends on natural resources like copper, according to Dana Sasarean, Associate Director of Mining Research at ESG research, ratings and analytics firm Sustainalytics.
“Copper is a versatile metal across infrastructure, transportation and industrials, with strong electrical and heat transmitting qualities,” she said.
“It’s a reliable option for wind or solar, as well as carbon capture technologies, nuclear power, and electric vehicles.”
Due to its versatility, research and consultancy group Wood Mackenzie has estimated that a Paris-aligned 1.5°C temperature pathway will require 9.7 million tonnes (MT) of new copper supply over the next ten years from projects yet to be sanctioned, which is the equivalent of nearly a third of current refined consumption. This will require US$23 billion in investment per year over 30 years, the report said.
Teck’s QB2 project in Chile is expected to produce between 285,000-315,000 tonnes of copper annually between 2024-26, with the company expecting to increase its overall copper production to between 545,000-640,000 tonnes per year over that two-year period.
It is important that investors and mining companies also focus on recycling infrastructure to develop an efficient circular economy for the industry, Sasarean said.
“We will not have an endless supply of copper ,” she warned.
Despite securing public support for its proposal from a number of shareholders, Teck shelved it before the AGM due to fears it would not secure support from the required two-thirds of shareholders.
“We see the [proposed] separation as a positive because we think it opens up a wider shareholder base for Teck,” said Krassiouk from Letko Brosseau, noting that some investors may not want exposure to coking coal, but may want to invest in the production of critical minerals.
Norway’s sovereign wealth fund Norges Bank Investment Management (NBIM) said it would support Teck’s proposal. China’s sovereign wealth fund China Investment Corp (CIC), which has a 10.3% stake in Teck’s single voting B shares, favoured the Glencore alternative.
Glencore has proposed a merger between it and Teck prior to separating the two arms of the business. One of the two newly formed entities, called GlenTeck, would amalgamate Glencore and Teck’s metals and minerals portfolios. However, debate rages around Glencore’s plans for the second company, which would combine the two parent firms’ coal businesses.
Teck rejected Glencore’s bid, claiming that its plans would expose shareholders to thermal coal and oil trading, which would go against its objective to transition toward producing commodities that support the energy transition.
“[Glencore’s] proposal would have either forced us to invest in thermal coal if we wanted to keep exposure to coking coal, or accept a valuation for coking coal, which we thought wasn’t acceptable,” said Krassiouk.
Terry Howard, Senior Portfolio Manager and ESG Lead at Letko Brosseau, added that the firm has made a “hard and fast decision” that it would not invest in companies for which thermal coal makes up “a meaningful part of their business”.
In response to these concerns, Glencore said it would shield any Teck shareholder wary of fossil fuels for up to US$8.2 billion, or alternatively give investors shares in GlenTeck, should the merger come to fruition.
Teck CEO Jonathan Price has argued there is a difference between steelmaking coal and thermal coal, with steelmaking coal expected to remain a necessity throughout the climate transition, whereas thermal coal assets are expected to be phased out.
Meanwhile, Teck’s proposal to end its dual class share structure (DCSS) did go ahead, with 98% of shareholders voting in favour of phasing out the special voting rights of class A shareholders after six years.