Proactive Investors - Glencore PLC (LSE:LON:GLEN) could be the proud owner of Teck Resources (TSX:TECKa) Ltd's metallurgical coal assets by the end of 2023, according to analysts.
The much fraught deal, announced earlier this year, has gone through multiple offers and counteroffers, with Teck initially rebuffing Glencore’s advances to acquire the company outright.
Glencore countered with an offer to purchase Teck’s steelmaking coal business (EVR) in a cash deal.
A notable factor driving this renewed interest is the remarkable surge in the benchmark hard coking coal price, which has escalated by over 35% since mid-June. The surge coincided with Glencore's disclosure of its offer to purchase EVR in June, propelling the coal price to levels surpassing those observed when Glencore initially made its bid for Teck public in early April.
Teck told investors it was fielding multiple bids for the business.
But Jefferies sees Glencore as the prime contender best positioned to acquire EVR, bolstered by its strategic positioning and market influence. Analysts have a 'Buy' rating on both Teck Resources and Glencore shares.
What’s driving this renewed interest? Factors such as seasonal supply constraints and the potential for additional stimulus in China further augur well for an increase in met coal prices during the approaching winter months.
Meanwhile, the state of the Australian coal market, a crucial player in the global coal trade, is also undergoing changes. Recent announcements by the New South Wales (NSW) government regarding an increase in coal royalties are expected to have a profound impact. This move is likely to lead to lower coal supply, thereby driving prices upwards over time.
Given that 7-10% of seaborne met coal supply originates from NSW, this development holds significance in the market, according to Jefferies.
Insights into Teck Resources' strategies have also shed light on the valuation and potential scenarios surrounding the sale of EVR. Glencore's initial offer of US$8.2 billion in cash for EVR in April set the valuation standard, Jefferies noted, and subsequent fluctuations in the met coal price saw Glencore considering the purchase of EVR alone, providing more flexibility in determining the price.
While Teck has changed its tune to saying that it’s open to both a full sale or a partial sale, shareholders are anticipated to favor a clean split over a partial spin-off based on past feedback, Jefferies wrote.
“As the EVR sale process winds down, we would view a sale to major steelmakers to be a marginal net negative for the met coal market over the longer-term as there would be less demand in the spot market, while a sale to Glencore would be a net positive based on the company's strategy to gradually wind down its coal operations and practice a ‘value-over-volumes’ approach,” analysts wrote.
“Glencore’s ability to control a larger portion of the seaborne met coal market in its trading operations would be positive for Glencore as well.”
Teck’s US-listed shares were up around 1.2% in New York on Friday at $44.28, while Glencore’s London-listed shares were 1.4% higher.