Teck makes best of a bad situation with the Anglo American deal. But it may never happen

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As late as the start of this year, Norman B. Keevil, the chairman emeritus of Teck Resources Ltd. TECK-B-T and the Vancouver company’s controlling shareholder, seemed to be jealously guarding the company’s independence. Teck was a homegrown Canadian champion and the last diversified miner of any size left in the country; most of the rest had been bought by rapacious foreign takeover artists and hollowed out. Plus Teck was reinventing itself as a potentially high-value critical metals player, with a focus on copper from its massive Quebrada Blanca (QB) mine in the Chilean Andes.

His message: Give us time; we are not for sale, even if Teck would be open to a joint venture with the Collahuasi copper mine just down the road from QB, of which Anglo owns 44 per cent. But Mr. Keevil said he would resist a JV that would turn Teck into a minority shareholder in the combined mining operations. “I spent 60 years helping to build this company, and I see it continuing to grow,” he told The Globe and Mail. “QB is a core Teck operation, and I expect it to stay that way.”

On Tuesday morning, Mr. Keevil had a somewhat different message. He was fully endorsing Teck’s merger with Anglo American NGLOY of London, one of the industry’s biggest mining companies. He will use his 100-vote Teck A shares to endorse the creation of the world’s fifth-biggest copper producer.

Teck undertaking major overhaul at QB2 mine in Chile after years of struggles

While the merger is being billed is a “merger of equals,” not a takeover, there is no doubt that Anglo has the upper hand. The all-share, no-premium proposal will see Anglo shareholders own 62.4 per cent of the new company, to be called Anglo Teck; the rest will be owned by Teck’s shareholders. Anglo’s stake would have been higher – probably near 70 per cent – had Anglo not agreed to pay out a special dividend, worth US$4.5-billion, to its shareholders, a move that will reduce Anglo’s overall value.

Anglo’s South African chief executive, Duncan Wanblad, will become the CEO of the merged business. In a win for Teck and Canada, he will base himself in Vancouver – cheerio, London. The younger Teck CEO, Jonathan Price, a Briton, will become deputy CEO, which makes him the heir apparent unless he botches the two companies’ integration, a long effort that will be aimed at cutting costs and boosting profits on a grand scale.

Why the apparent change in strategy at Teck? How to explain Mr. Keevil’s alacrity to endorse a merger that, in effect, works against Teck’s ambition of reinventing itself as a pure critical metals company? The bigger Anglo has lavish amounts of copper but it is also heavily exposed to iron ore, crop nutrients – fertilizer – steelmaking coal and diamonds, through De Beers (coal and diamonds are to be sold but buyers are not exactly lined up for either division).

Not long ago, QB and the mine’s ambitious expansion program, known as QB2, were supposed to put Teck on the global critical metals map. Teck even went so far as to sell its metallurgical coal business, which was pumping out gorgeous amounts of cash flow, to Glencore of Switzerland. Teck would be a copper giant, dominated by QB’s production, with some zinc at its side.

Blame QB2 for the strategic climbdown. The COVID-19 pandemic lengthened QB’s expansion schedule, as did various engineering setbacks, ensuring the development went way over budget. The original cost estimate of the expansion came in at US$5.2-billion; the final price will be as much as US$8.8-billion. QB2’s first output came in March, 2023, almost two years later than planned.

The mine’s relatively low-grade ore makes it difficult for the project to earn a decent return. The average grade, at 0.52 per cent per tonne of ore mined, compares badly to Collahuasi’s 0.8 per cent. Production shortfalls have compounded the problems and had pushed Teck shares down by 20 per cent over the past year.

Perhaps Mr. Keevil knew that QB might be more curse than blessing and that recruiting a big-name partner would help insulate Teck from QB’s endless ability to disappoint. He hinted as much on Tuesday. “When you have cost overruns, scale helps,” he told The Globe.

Mr. Price and Mr. Keevil are making the best of bad situation, it appears, which helps to explain why Teck agreed to a no-premium merger. For Teck, this is as good as it gets, all the more so since the head office is to remain in Vancouver and the board will have equal representation from both companies. Without too much stretching, Mr. Keevil can claim that his legacy is not being sent to the smelter furnace.

But Mr. Keevil may not get his wish. The Investment Canada review process, and other regulatory examinations, will take as long as a year-and-a-half, the companies said. A lot can happen in that time. Anglo and Teck have both attracted suitors in the last two years – BHP Group went after Anglo and Glencore after Teck – suggesting the lure of putting Collahuasi and QB together may present a once-in-a-lifetime opportunity for rivals to bulk up in the metal.

There is no doubt that the mining biggies, including BHP, Glencore, Rio Tinto and the billionaire Luksic family of Chile, who control the copper-heavy Antofagasta mining empire, are mulling their options. Their way in is to offer a fat premium for either Teck or Anglo in the absence of a premium. Shareholders will ultimately decide who owns what in this saga and the highest bid usually wins. Teck shares soared on Tuesday, suggesting shareholders are betting on a bidding war.