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Andrew Willis: Teck (TECK.B)’s shareholders would be lucky to get another offer. After the mining company rejected Glencore’s bid, which was at a 20% premium, we raised our fair value for the stock – but only in the hopes of another bid.
Glencore’s offer was generous enough, coming in at 7% above our bull-case fair value for Teck, at a time when Teck’s coal business is experiencing declining demand from China and the company remains one of the higher-cost copper producers we cover. Teck has a profitable zinc and lead business, but the offer suggested enough upside that it has up increasing our fair value by around 40% - for now.
Equity analyst Jon Mills says Teck shareholders should sit tight for now and see if a superior offer is forthcoming. Glencore can now either raise its bid, pitch directly to Teck shareholders or walk away. He also added that it’s possible other bidders emerge, particularly given the attraction of Teck’s substantial copper growth pipeline.
Any buyers interested in Teck will need to move fast to prevent the company from doing its own restructuring with a spinoff of its coal business, which is set for a vote on April 26. In the interest of keeping our fair value where it is, we hope another offer emerges before then.
For Morningstar, I’m Andrew Willis.
Bulls Say
- Emerging-markets demand for steel, producer consolidation and supply discipline and the relative paucity of high-grade metallurgical coal deposits could backstop pricing.
- Teck has the option to boost annual metallurgical coal production if prices warrant. This capacity expansion could come at a low incremental capital cost.
- Teck is materially increasing its copper production to take advantage of increased demand for the red metal due to trends including decarbonization and electrification.
Bears Say
- A slower-growing Chinese steel industry if investment growth in infrastructure and real estate slows and ultimately reverses would likely exert significant downward pressure on metallurgical coal prices.
- In aggregate, Teck's copper business isn't particularly cost advantaged, and in periods of weak copper prices, certain operations might struggle to generate positive margins.
- Teck lacks the scale of larger peers, such as BHP Billiton and Rio Tinto. With an increasing focus on leveraging technology to lower unit costs, Teck may be disadvantaged given a lack of relative scale.
Editor's Note: All images are courtesy unsplash.com and APImages.
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