Teck Resources confirms mulling a coal business spin-out

Teck Resources (TSX: TECK.A | TECK.B; NYSE: TECK), has confirmed it is considering spinning out to shareholders its metallurgical coal business, sending shares up more than 10% on Thursday.

The company responded to a Bloomberg report citing unnamed sources claiming the potential US$8 billion spinoff could be announced as early as next week.

Teck said Thursday it was investigating alternatives for the unit, including the possible spin-out of interest in that business to its shareholders.

“Any transaction would be expected to create value for Teck’s shareholders and support continued benefits for communities and Indigenous Peoples in the areas where Teck operates,” the company said in a statement.

Teck has been weighing options for its coal division for more than a year in a strategic shift toward mining more base metals and reducing the carbon footprint.

No decision has been reached on proceeding with a transaction, and Teck said in its release it had no further comments.

Canaccord Genuity mining analyst Dalton Baretto is so excited by the news that he increased his share price target for Teck by about 30% to $70 per share from $53.50.

Teck is scheduled to report its full-year and Q4 results on the morning of Feb. 21.

Baretto notes that this is the second significant move by the company to separate its base metals and fossil fuel businesses, the first being the sale of its stake in Fort Hills, Alta., in Nov. 2022.

The analyst views this potential transaction favourably.

“That said, the coal business has been the cash flow engine that drove the construction of Quebrada Blanca 2, including many special dividends,” and he noted that after a spin-out, the base metals business will have to fund its entire growth pipeline on its own.

Baretto currently values the coal business at $11 billion or $21.51 per share and the base metals business at $16.8 billion, or $32.84 each.

He further noted that these valuations do not factor in corporate adjustments. Should he assume the net corporate debt is attributable to the base metals business, at his valuation above, the base metals unit trades at just 3.0x 2023 EBITDA compared with the Canadian producer peer group average of 7.2x.

As such, he believes significant value can be unlocked by cutting out the coal business.

Baretto estimates it’s trading at 2.9x its 2023 EBITDA.

Speculation seen before

BMO Capital Markets mining analyst Jackie Przybylowski is unsure if a transaction is likely.

“We have seen similar speculation before (including Sept. 2021), and, in our view, the sale is equally unlikely today – the speculated price is above our estimated valuation, and timing is premature. We haven’t made changes to rating/target,” the mining analyst said in a note to clients.

BMO reckons the coal business is only worth $6.4 billion.

“How much of Teck’s $4.6 billion net debt (on Sept. 30, 2022) should be attributed to coal is an important question. If 50% of the debt is added, our coal NAV falls to $4.1 billion, or US$3.1 billion at today’s exchange rate,” according to Przybylowski.

Teck is one of the world’s largest exporters of metallurgical coal. The company produced more than 24 million tonnes in 2021 from four operations in western Canada. The business accounted for 55% of the company’s gross profit.

The world’s major miners are increasingly looking to exit fossil fuels. Rio Tinto Group (ASX: RIO; LSE: RIO) has left coal completely, while Anglo American (LSE: AAL) has sold out of thermal coal. BHP (NYSE: BHP; LSE: BHP; ASX: BHP) divested some of its thermal coal and quit oil and gas entirely.

BHP and Anglo still have large met coal operations, the sort of coal business Teck is looking to sell, making them prominent potential suitors.

The company’s most-traded equity closed 4.4% higher on Thursday at $58.75 after achieving a new 12-month high at $61.95. It has a market cap of $30.3 billion.