Teck Resources Ltd. is likely to pursue a clean separation of its coal and metals businesses through a spinoff instead of a coal asset sale, though doing so could mean sacrificing lucrative cash flows from the proposed coal company that could have funded base metals growth, analysts say.

In an eleventh-hour decision last week, Teck bowed to shareholder pressure and fierce criticism from Glencore PLC, which wants to buy Teck, and ditched its original spinoff proposal. Under that now-abandoned plan, Teck's proposed metals-focused company would have kept a hefty coal royalty through a multiyear transition period.

Teck is back to the drawing board after withdrawing the proposal as it seeks to jettison its coal assets and carve out a more environmental, social and governance-friendly base metals company.

The diversified miner offered few details on a revised strategy. On an April 26 earnings call, CEO Jonathan Price said Teck would focus on "a simpler and more direct approach," incorporating feedback from shareholders. While options for Teck could include mergers and acquisitions or a sale of coal assets, several analysts say they expect the company to stick to a clean asset split, in which the coal company and metals company go their separate ways.

"A straight spin out of coal would be the best option with no cash flowing back to Teck [Metals]," David Davidson, a base metals analyst at Paradigm Capital, an investment firm that covers Canadian equities, told S&P Global Commodity Insights in an email.

Coal cash cow

Teck's plan drew shareholder blowback as it would link coking coal to the metals-focused company, muddying the waters over how ESG-friendly the latter would be to investors or other mining companies looking to partner and engage on base metals deals.

On the other hand, the coal royalty would have helped Teck's proposed metals company fund its growth. In recent years, Teck's metallurgical coal business has dominated the miner's revenues and profits, according to a Commodity Insights analysis of the company's annual reports since 2017. In 2022, base metals drove C$2.17 billion in Teck's gross profits, while Teck's steelmaking coal gross profits surged to C$6.4 billion on the back of a strong coal market.

"The move creates more uncertainty on what the proposed separation would look like, including potentially floating a larger market cap coal company into the market, which could lead to multiple deteriorations and reduce funding to unlock Teck's copper growth pipeline," National Bank of Canada analysts said in an April 26 note.

Weak coal market

Analysts threw cold water on a potential sale of coal assets as one alternative to a spinoff, raising doubts Teck would get enough value for them amid a coal market that has weakened in the past year.

Prices for coking coal, used in the steelmaking process, peaked in March 2022 at over US$600 per metric ton, according to S&P Global Market Intelligence data. Coking coal prices fell under US$200/t in August 2022, rebounded somewhat in early 2023 and have since retreated again, trading under US$300/t in recent weeks.

The potential sale price Teck could receive for the coal assets in a cooling market would likely be "too low," John Tumazos, a veteran mining analyst at Very Independent Research, said in an email.

Timing now key

In recent years, Teck has hinged its growth plans on base metals in a move away from fossil fuels and steelmaking coal.

As Teck prepares an alternative strategy, revising the timing of any proposal or transaction may become an important focus amid the ongoing ramp-up of the capital-intensive, phase-two expansion of its Quebrada Blanca operation (QB2) in Chile and other copper growth plans. The longer the miner reaps profits from the coal business, the more cash it has to help offset the expense of developing new projects and mines on its copper-focused path.

QB2, once at full production, is set to about double Teck's copper output, adding 285,000 to 315,000 metric tons of annual copper production starting in the next couple of years.

"In our opinion, a more direct approach is likely to come with additional tradeoffs, and the question remains what Teck could be willing to sacrifice," B. Riley Securities analysts said in an April 28 note, pointing to QB2. "In this context, we believe the timing of any future separation could become another important consideration."

In the longer term, a clean split will garner Teck more value for its base metals assets, analysts said. Divesting carbon-intensive operations will "ultimately unlock what is a highly attractive copper growth pipeline which, as a standalone business, we believe will be more attractive to potential acquirers leading to multiple expansion when achieved," the National Bank analysts said.

Teck did not respond to a request for comment.

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