The London-listed mining giant wants to make a deal with a Canadian rival that would create significant value, but it will need to do more to win this one.
The potential for a re-rating of Glencore (LSE:GLEN) shares was today in focus as the mining giant considers its next move on a merger/demerger plan for its thermal coal assets.
Glencore wants to join forces with Canada’s Teck Resources (NYSE:TECK) and simultaneously split their combined coal and metals operations into two standalone companies.
The proposal, which is similar to Teck’s current plan to separate its base metals and coking coal assets into two separate entities, has been rejected by the New York-listed firm on grounds including value, complexity and concern over thermal coal exposure.
Glencore said yesterday that its plan would create significant value for both sets of shareholders, pointing to substantially larger and more diversified portfolios of assets than those of the proposed standalone Teck Metals and Elk Valley Resources.
However, London-listed Glencore shares fell after the proposal was revealed yesterday, continuing a poor run for the widely held stock so far this year.
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Glencore is down by around 20% from its January record high of 580p and fell as far as 412p in mid-March as higher US interest rates and the potential negative impact from stress in the global banking system dented valuations across the mining sector.
The shares revived 11.1p to 463.5p today, buoyed by the continued support of analysts at UBS and Deutsche Bank after they highlighted price targets of 560p and 575p respectively.
UBS said it viewed the Teck proposal as a positive development, adding that it may still accelerate change and crystallise value even if Glencore fails to land a deal.
The Swiss bank, which recently switched to a “buy” recommendation, added: “We believe Glencore remains well positioned versus peers due to commodity mix, superior cash generation and growth/restructuring optionality.”
The company boasts a strong portfolio of decarbonisation metals such as copper, cobalt and nickel, as well as about 26 coal mines across Australia, Colombia and South Africa.
An estimated 85% of this production is exported to countries where coal continues to play a leading role in power generation given its reliability and affordability. Glencore intends to oversee a responsible decline of its thermal coal portfolio in line with an ongoing ambition to achieve net zero by 2050.
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Glencore is scheduled to post a production update on 26 April, the same day Teck shareholders are due to vote on the company’s existing separation proposal.
UBS believes that Glencore could sweeten its interest before then, having offered a 20% premium to the undisturbed Teck share price. The current level implies a market cap of $23 billion, with Glencore shareholders holding 76% of the merged entities.
The proposed coal operation would be listed on the New York Stock Exchange, have zero net debt and return all cash flow to shareholders. The remaining MetalCo would include base metals, energy marketing, recycling and the grain handling business Viterra.
Teck is the world's second-largest seaborne exporter of steelmaking coal, with four operations in Western Canada and significant high-quality steelmaking coal reserves.
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