Canada can’t build great mining companies fast enough to meet demand

Mining runs on M&A — one of the only constants in a business that’s full of uncertainty. Still, it’s been painful to watch so many home-grown metals and mining companies disappear in recent years.

They include: Alcan, which Rio Tinto bought in 2007 for US$37.6 billion; Falconbridge, which was acquired by Xstrata in 2006 for US$17.4 billion; Inco, which went to Vale that same year in a deal worth US$17.2 billion; and Goldcorp, which Newmont paid US$10 billion for in 2019.

Soon, Vancouver-based Teck Resources, which is being pursued by Swiss-based Glencore, could join the list.

Teck’s board has rejected Glencore’s US$23.2-billion bid (mostly shares, with an up to US$8.2 billion cash component for shareholders who don’t want exposure to coal and oil), first made public in early April. But if Teck shareholders reject the company’s plan for a spinoff of its metallurgical coal assets in a vote scheduled for tomorrow, the board would need to sit down with Glencore, which has signalled it’s willing to pay more for the diversified miner.

The problem is, it takes time to build companies worth acquiring. Alcan was founded in 1902; Falconbridge in 1928, Inco in 1902, and Goldcorp in 1994. Teck celebrated its 100th anniversary in 2013.

Glencore already owns the historic Falconbridge assets, acquired via a US$31-billion takeover of Xstrata in 2013.

Canada builds great mining companies, but we can’t build them fast enough to keep up with demand.

And demand is high — mining M&A is at its highest level in a decade. According to New York-based law firm White and Case, there were 288 deals worth US$88.2 billion last year. While that was down 2% in value from 2021, the firm noted in a March post that M&A in mining “massively outperformed” global aggregate M&A activity, which dropped 34% (measured by deal value).

The math is simple. Historic underinvestment in new mines over the past decade + long approval timelines for new projects + growing demand for minerals = more M&A to come. Rather than focus on finding or building new assets in recent years, miners have opted to spend their cash on share buybacks and upping dividends to shareholders; now they’re hungry for reserves.

“A mining company without ore reserves is an oxymoron,” said Teck’s chairman emeritus Norm Keevil in a letter to shareholders on Apr. 16, noting the company built or acquired 17 new mines over 30 years. “…Our previous best growth years resulted from a steady process of adding reserves over many years, one new mine at a time.”

Whether or not Glencore gets the prize, it seems certain that a merger with someone is in the cards for Teck. Teck has noted that it is open to a post-separation deal involving its base metals division, which includes a majority stake in its huge new Quebrada Blanca 2 copper mine in Chile, meaning shareholders could get a much better deal than what Glencore is offering. With no other Canadian companies of size left to digest such a deal, however, that someone is not likely to be Canadian. (International miners Vale, Anglo American and Freeport-McMoRan have all approached Teck, according to The Globe & Mail.)

Should that matter?

Perhaps the most interesting comparator to the play for Teck is the takeover that didn’t happen — BHP’s failed bid in 2010 for Potash Corp. of Saskatchewan, a one-time crown corporation established in 1975. (After merging with Calgary-based Agrium in 2018, it’s now Nutrien.) BHP’s nearly US$40-billion all-cash hostile offer was rejected by PotashCorp’s board. Saskatchewan’s former premier Brad Wall, who vehemently opposed the offer, said it provided no “net benefit” to Saskatchewan and Canada in terms of jobs and investment, Canadian control of an important Canadian resource, and provincial revenues.

“Do we want to add PotashCorp to that list of once-proud Canadian companies that are now under foreign control?” Wall asked at the time.

“In the past decade, promises about maintaining jobs, corporate headquarters and future investment have all been broken. We simply cannot take that risk with this valuable resource that belongs to the people of Saskatchewan.”

In the end, Tony Clement, industry minister in Stephen Harper’s Conservative federal government, used the Investment Canada Act to block the takeover, giving BHP 30 days to improve the offer. Understanding it would likely be futile, BHP withdrew the bid instead.

In Teck’s case, B.C. Premier David Eby told Business in Vancouver last week that like Wall, he was concerned about the potential loss of jobs, as well as Glencore’s handling of “sensitive” environmental matters, and would be lobbying the federal government to block a Glencore takeover.

He also voiced concern about bribery charges against the company in the U.K. and U.S. (Glencore pleaded guilty to the charges, setting aside US$1.5 billion to settle the cases.)

“I recognize we’re in a global economy here in British Columbia and we have lots of international actors, but Glencore’s record is really problematic,” Eby said.

The federal Liberal government, which has so far earmarked tens of billions in tax credits aimed at building a secure critical minerals supply chain from mining to manufacturing, also seems determined to see Teck stay in Canadian hands.

“We need companies like Teck here in Canada — companies with a strong commitment to Canada,” Finance Minister and Deputy PM Chrystia Freeland, Industry Minister Francois-Philippe Champagne and Natural Resources Minister Jonathan Wilkinson wrote in a letter to the Greater Vancouver Board of Trade this week, as reported by Reuters and The Globe & Mail. “This is all the more important today as we confront unprecedented geopolitical, economic, and environmental changes.”

While Canada has seldom sought to block foreign takeovers in the past, it hardened its stance against state-owned entities (and particularly Chinese investment) in the critical minerals sector last year. Security of supply concerns and resource nationalism mean the rules are changing rapidly — even for investment from like-minded nations (see Chile’s recently announced plans to nationalize its lithium industry).

With lots of parts in motion, it’s impossible to say how the Teck saga will conclude.

But there’s a lot at stake, as mining luminary (and dual U.S.-Canadian citizen) Robert Friedland recently summed up on Twitter:

“Losing another quintessential Canadian support mechanism to multinationals could corporatize and hollow out our unique ecosystem that has so successfully explored our vast landmass.”