Proactive Investors - Analysts at Stifel increased their price target and reiterated their Buy rating on Teck Resources (TSX:TECKa) Limited following the copper-focused company’s plans to separate Teck into two separate companies, Teck Metals and Elk Valley Resources (EVR).
Teck has called on shareholders to vote on April 26 for their existing plan to separate Teck into Teck Metals and Elk Valley Resources (metallurgical coal).
“In effect, a vote for Teck's plan is a vote against Glencore (LON:GLEN)'s merger plan, which Teck CEO Jonathan Price noted was ‘not actionable’ and ‘value destructive’ for shareholders,” analysts at Stifel said in a note to clients.
“Our take on Glencore's offer remains unchanged, as we continue to view Glencore's proposal as unlikely to gain enough shareholder support to overcome Teck's value proposition.”
Stifel said that the separation plan provides “more choice, optionality and certainty” for shareholders.
Thumbs down merger with Glencore
“A merger with Glencore would dilute exposure to copper in the metals business, and make thermal coal the main driver of earnings before interest, taxes, depreciation and amortization (EBITDA) in the coal business,” the analysts added.
“These changes in portfolio mix are counter to the strategic direction Teck has been leading over the past several years.”
Based on Teck's analysis, 81% of Glencore's EBITDA comes from thermal coal, its marketing business, or assets in higher risk jurisdictions (leaving 19% from stable mining jurisdiction), as opposed to 100% in stable jurisdictions for Teck.
Stifel noted that once separated, Teck Metals and EVR could then attract their own bidders, maximizing their own value.
“Teck Metals in particular we think could be a more attractive target to a greater number of potential suitors, should the board and the controlling shareholders be willing to sell the company,” said Stifel.
“Adjusting our model incrementally on EVR spin out structure, we have moved our target price up a C$1 to C$66/share and reiterate our Buy rating.”
Bullish outlook for copper
As part of its investment thesis, Stifel said the long-term bullish outlook for copper, combined with Teck’s copper-focused growth profile and strong cash flow coming from Elk Valley Resources, has created an ideal scenario for Teck.
“One that we believe the investing market has not yet adequately appreciated,” noted Stifel.
“We expect that a start-up of QB2 in early 2023 will establish Teck as a significant global copper producer, which in combination with its other growth opportunities, should provide several catalysts to generate incremental value over the coming years.”
With 70% of net asset value derived from Canadian and US mines, Teck carries a low jurisdictional risk.
Teck is a diversified resource company focused on copper, zinc, and steelmaking coal, which is also known as hard coking coal or metallurgical coal, and oil.