Ever since its ill-fated foray into, and exit from, Alberta’s oilsands, some shareholders at Teck Resources Ltd. have been questioning the company’s leadership decisions, as well as its ownership.
The company is tightly held by the Keevil family through a dual-class structure that gives class A shareholders 100 votes to every class B share.
In 2020, two hedge funds that owned Teck stock – Tribeca Investment Partners and Impala Asset Management – publicly called for an overhaul at the company, including the replacement of former CEO Don Lindsay, an end to Teck’s dual-class structure and an exit from high-carbon assets such as oil and coal.
They are now getting what they asked for. In September 2022, Lindsay retired, and on Feb. 21 of this year, Teck announced a radical restructuring that includes hiving off its metallurgical coal mines into a separate company and phasing out its dual-class structure.
It’s a move that appears to be designed to mollify ESG-minded investors who don’t like their copper investments tainted with coal – not even the kind that is profitable and essential to making the steel that goes into electric cars, wind turbines, batteries, high-voltage towers and myriad other components of decarbonization.
Under its restructuring plan, Teck’s four metallurgical coal mines in the East Kootenays will be hived off into a separate company – Elk Valley Resources Ltd. – while Teck Metals Corp. will keep the company’s base metals assets, which include copper mines in B.C. and Chile, a zinc mine in Alaska and a lead-zinc smelter in Trail, B.C. Both companies will be publicly listed and headquartered in Vancouver.
Under the plan, Japan’s Nippon Steel will invest $1 billion for 10 per cent of the new Elk Valley Resources (ERV) coal company and will secure new off-take rights as a result. Nippon Steel will have an option to acquire up to 17.5 per cent of Elk Valley Resources’ common shares.
“In order to address a concern that steelmaking coal production capacity may shrink in the future, since capital investment for fossil fuels, including coal, has been decreasing in a trend of pursuing carbon neutrality, Nippon Steel has decided to increase its investment in high-quality steelmaking coal, which is essential in pursuing its own carbon neutral strategy,” Nippon Steel explained in a news release.
Based on Nippon Steel’s $1 billion investment, Teck puts the valuation of the new coal company at $11.5 billion – about half of Teck’s current market capitalization of $23 billion.
The restructuring is subject to a vote by shareholders next month at a special meeting. Once the spinout is approved, new EVR shares would begin publicly trading in June this year.
“I think Teck’s announcement is good news,” said Michael Goehring, CEO of the Mining Association of BC. “I think the potential to have two world-class mining companies based in B.C. is very positive for the mining industry and the province. I see a very strong value proposition for shareholders for both companies once the deal closes.”
Being a diversified mining company worked well for the company in the past. But Teck appeared to have crossed the line with some shareholders when it tried to diversify into oil.
In 2006, Teck began investing in Alberta’s oil sands, eventually taking a 21.3 per cent stake in the $17 billion Fort Hills oil sands project, and proposing to spend $20 billion to build the wholly owned Frontier oil sands project.
By the time Fort Hills went into operation in 2018, Canadian oil prices were in a deep trough, partly due to a lack of pipeline capacity. Western Canadian Select had dropped from US$73 per barrel in 2014 to US$38 per barrel in 2018. Teck recorded a meagre $10 million profit from oil in 2019. Otherwise, between 2018 and 2021, Teck recorded net losses totalling $624 million from its energy assets.
Oil was not only a money loser for Teck, the investment climate for new oil sands projects had also become uncertain under the Trudeau government. Ultimately, Teck decided to pull the plug on its $20 billion Frontier oil sands project and take a $1 billion write-off.
Tribeca Investment Partners and Impala Asset Management called for then-CEO Lindsay’s replacement, and for the company to divest from oil and coal to focus on metals.
Bob Bishop, CEO of Impala Asset Management, told BNN Bloomberg that Teck had been making bad investment decisions.
“I think it’s highlighted by the Fort Hills project, where they’ve spent about $6 billion and they’ve got nothing for it, and the Frontier project, where they spent $1 billion,” Bishop said.
While Lindsay survived the call for his head in 2020, he eventually stepped down, formally retiring in September 2022.
Teck has now fully divested from the oil sands. In December 2022, the company announced it would sell its 21.3 per cent share in Fort Hills to Suncor (TSX,NYSE:SU) and TotalEnergies EP Canada for $1 billion. Between the Fort Hills and Frontier projects, Teck took impairments of about $2 billion on its investments in oilsands projects.
Dissident shareholders also questioned Teck’s dual-class share structure and the disproportionate control it gave the Keevil family. With just 7.7 million shares, Teck’s class A shareholders hold more voting power than its 528 million class B shareholders – 59.5 per cent of aggregate voting rights, compared with class B shareholders’ 40.5 per cent, according to Teck’s latest management and information circular.
The largest class A shareholder is Temagami Mining Co., which owns 4.5 million class A shares (55.4 per cent). Keevil Holding Corp. owns 51.16 per cent of Temagami Mining, giving the Keevil family significant voting power. Norman Keevil, chair emeritus and special adviser to Teck, is a Canadian mining legend who helped build Teck into the company it is today. His son, Norman Keevil III, is CEO of Valence Water and the vice-chair of Teck’s board. SMM Resources, a subsidiary of Sumitomo Metal Mining Co., owns 1.5 million class A shares (18.9 per cent).
Under a share restructuring, Teck’s old class A shares will be acquired by Teck in exchange for one new class A common share and 0.67 of a class B subordinate voting share. Six years after this happens, all new class A common shares will automatically be exchanged for class B subordinate voting shares, which will simply become common shares.
Randy Smallwood, CEO of Wheaton Precious Metals, thinks it’s a smart move.
“That is a strong negative,” he said of the dual-class structure. “Different rights for different shareholders is never strong from a governance perspective.”
As for spinning out its profitable coal mines into a separate company, the move appears to be a capitulation to ESG fundamentalism that abjures all coal.
“In recent years, the investor bases for base metals and steelmaking coal businesses have become increasingly divergent,” Teck CEO Jonathan Price said in the company’s recent fourth-quarter earnings call.
“There’s a lot of shareholders out there that just will not invest in coal assets,” Smallwood said. “And so I think the diversity there was probably holding back value from their base metals business, which is very, very strong.”
