Teck Resources Ltd.'s confirmation of talks for the potential sale of its coal operations indicates an increasing likelihood for the Canadian mining company to pursue a straight asset sale, analysts said.

Teck confirmed June 12 that it had engaged in discussions with Glencore PLC, among others, over a nonbinding cash proposal to sell its metallurgical coal assets. Glencore also confirmed the talks in response to media reports. Analysts took the confirmation of the proposal as a sign that an outright sale of the assets has become a more serious option for Teck.

The diversified miner has long telegraphed it wants to separate its metal and coal units, and had sought to reap lucrative cash flows from the newly formed steelmaking coal company following a separation, at least for a time. The company put a proposal before shareholders in April, but ditched the effort after not receiving enough support.

For Teck, selling the coal mines may open potential dealmaking doors in the base metals sector and make the company more attractive to carbon-wary investors, according to analysts.

"Divesting the coal assets means ... they become more investible. It opens the world to fund managers who don't want [coal assets] in their portfolios," said Stefan Ioannou, a base metals mining analyst at Cormark Securities. "Potential partners can say, 'I don't have to worry about convincing shareholders to work with Teck with coal in it.'"

Simple asset sale

After Teck failed to convince enough shareholders its separation plan was the way to go, the miner went back to the drawing board, saying it would shift to a simpler and cleaner strategy. A straightforward sale of the coal assets could do just that, some analysts said.

The "all-cash bid from [Glencore] is an elegant way for the [Teck] board to meet its commitment to class B shareholders around a 'clean' separation between Teck Metals and Teck Coal, while also adequately capitalizing Teck Metals," Canaccord Genuity analysts said in a June 12 note.

How much Teck might get for the coal assets is unclear. Teck and Glencore did not disclose a price in their June 12 statements. Glencore, which has sought to acquire Teck in order to do its own coal-metals split, previously offered $8.2 billion cash for the coal assets as part of a $22.5 billion, share-heavy deal for the whole company.

Teck rejected the takeover offer, saying it wants to separate its coal and metals units first.

Glencore would offer an amount that is "considerably lower" than in its whole-company takeover offer, Orest Wowkodaw, a Scotiabank mining analyst, said in a June 12 note.

In contrast, Canaccord analysts cast $8.2 billion as a starting point for a higher price.

"We believe this is most likely the only all-cash bid for the entire coal unit currently on the table," the analysts said June 12. "That said, we believe the [Teck] board is likely to extract more out of [Glencore]."

Specific buyer type

While Teck has said multiple parties are interested in its steelmaking coal assets, the field of buyers is relatively narrow given the mines produce a carbon-intensive product.

Larger mining companies have been moving away from owning coal assets amid the energy transition. Even Glencore, a thermal coal giant, would pair Teck's coal assets with its own in a separate company, and plans to focus on metals that are key to the unfolding energy transition such as copper.

"The best buyers are Glencore, the Japanese trading companies, the Korean trading companies or ... private equity," Rick Rule said in an email. Rule is a veteran mining investor, and former president and CEO of Sprott U.S. Holdings Inc., a commodities asset manager.

Japan's Nippon Steel Corp. and veteran Canadian mining investor Pierre Lassonde are among those that have expressed interest in Teck's coal assets, according to media reports.

It is not clear if the Keevil family, which controls Teck through ownership of class A shares, would agree to sell Teck's coal assets to Glencore or another company.

Both Glencore and Teck declined to comment for this story.

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