Glencore sets clock ticking on break-up after sealing $9bn Teck deal

Glencore has set the clock ticking on a break-up of its giant commodities business after clinching a $9bn deal for the coal division of Canada’s Teck Resources.

The Swiss mining and trading house on Tuesday said it planned to merge Teck’s steelmaking coal business with its own coal assets before spinning off the combined unit within two years of completing the acquisition.

Such a demerger would create separate Glencore coal and metals companies, which the company says will create more value for shareholders of both businesses.

The coal deal marks the end of Glencore’s long and fractious pursuit of Teck, which began in April when it made an unsolicited $23bn bid for the whole of the company.

The decision to return to the coal business underlines Glencore chief executive Gary Nagle’s conviction that the heavily polluting fossil fuel still has a significant role to play in meeting the world’s energy and infrastructure needs.

Glencore has agreed to pay $6.9bn in cash for a 77 per cent stake in Teck’s coal business that supplies the steel industry. Japan’s Nippon Steel and South Korea’s Posco will own the rest.

A resurgence in coal prices in recent years sent Glencore’s shares to a record high late last year and delivered bumper profits for the London-listed company.

The company’s shares rose 3 per cent to 443.65p by late morning in London.

During its pursuit of Teck, Glencore had set out plans to eventually spin off the Canadian group’s business and its own existing coal unit into a separate company.

Glencore reiterated that it intended to demerge the combined business within 24 months of the Teck deal closing, after having reduced Glencore’s net debt.

Following the spin-off, which would have to be approved by shareholders, Glencore intends to list the enlarged coal business in New York with secondary listings in Toronto and Johannesburg.

“The investors in the US are very eager to buy this cash-yielding company and we believe we would get a better valuation for this business in New York than we would in London,” Nagle said.

Glencore’s vast metals operations would remain listed in London. It is not yet clear where Glencore’s profitable energy trading division would sit, he added.

The Teck acquisition hands Glencore some of the industry’s most coveted assets, including four metallurgical coal mines in British Columbia, which it will combine with its own thermal and metallurgical coal mines in Australia, Colombia and South Africa.

Justin Hance, a portfolio manager at Harris Associates, Glencore’s 13th largest shareholder, backed the Teck deal, saying the proposed demerger of the enlarged coal business would create value “by highlighting focus on the company’s high quality metals business”.

Rory Kutisker-Jacobson, a portfolio manager at Allan Gray, a South African asset manager and top-30 shareholder in Glencore, said the acquisition would create a “bigger and better coal business” but expressed concerns about the proposed split.

“On the potential demerger itself, we are more indifferent to cautious. We are not convinced financial engineering will result in two halves greater than the whole, and we like how the existing thermal coal business can act counter cyclically to the fortunes of their future facing commodities businesses,” he said.

For Teck, the sale of its coal assets will allow the company to focus on its widely coveted portfolio of copper projects in Chile, Canada and Peru.

“This transaction will be a catalyst to refocus Teck as a Canadian-based critical minerals champion with an extensive portfolio of copper growth projects, unlocking the full value potential of the company,” said Teck’s chief executive Jonathan Price.

Price told the Financial Times that Teck would end up with $8.6bn in cash from the sale, which will be used to pay down debt, fund the expansion of its base metals production and make a “significant” return of cash to shareholders.

Glencore’s initial pursuit of Teck raised political concerns in Canada and the deal will need to be approved by the government under the Investment Canada Act. It will also need a sign off from competition regulators.

In an effort to allay fears of a foreign company taking control of some of the country’s key natural resources, Glencore has made a series of commitments, including a pledge not to cut jobs and invest $2bn in the operations over the next three years.