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Coal is still key to Teck – and our energy transition

Sauder School of Business economist questions underlying value of Teck’s de-merger plans
Teck Resources CEO Jonathan Price

Never mind that the steelmaking coal Teck Resources Ltd. (TSX,NYSE:TECK.B) produces is as essential to the energy transition as copper or lithium.

And never mind that the coal mined in B.C. has a comparatively low carbon intensity, thanks to B.C.’s clean hydropower.

Coal is coal, and coal is bad, as far as the universities, pension funds, foundations and other institutional investors focused on sustainable investment are concerned.

Divesting from oil and coal is therefore the quickest path to high environmental, social and governance (ESG) scores and cleaner, more sustainable or socially responsible portfolios.

“Right now, if you’re looking at a company like Teck, a lot of sustainable managers immediately just have to write off Teck,” said Mike Thiessen, partner at Genus Capital. “So, you’re missing out on all of those investors because they don’t want to be investing in coal because it’s not aligning with their clients’ values.

“Often that’s kind of the low-hanging fruit in creating a sustainable portfolio. And so many institutions now have these carbon reduction goals by 2030, 2040. And the only way to do that is not invest in coal.”

The truth is that green steel from hydrogen at scale is decades away, meaning steelmaking coal remains essential to wind turbines, electric vehicles, nuclear power plants and transmission lines needed for the global transition to cleaner and renewable sources of energy.

Yet there is little room for coal in ESG.

Eager to grow its copper business, but worried its coal assets could deter some investors, Teck announced a plan in February to hive off its B.C. coal mines into a separate company. The hope is that socially responsible, ESG-minded investors will be more inclined to invest in a pureplay metals company free of coal (though supported by coal-related profits).

“In recent years, the investor bases for base metals and steelmaking coal businesses have become increasingly divergent,” Teck CEO Jonathan Price said in March.

But at least one Teck shareholder – Werner Antweiler, who teaches environmental and energy economics at the University of British Columbia’s Sauder School of Business – is critical of the move. He said Teck may be putting too much stock in consultants pushing the benefits of ESG purity and setting itself up for a takeover.

“I own shares in Teck,” Antweiler said. “They have gone up. I’m happy. But why? Because it’s a takeover target now.”

Sensing weakness, Swiss mining and commodities giant Glencore PLC (LON:GLEN) swooped in with a US$23 billion offer to buy the company outright, causing a stir of Canadian nationalism, with many high-profile Canadians and politicians opposed to the idea of a great Canadian mining company being gobbled up by a foreign giant that has been haunted by recent bribery scandals.

“Once you start de-merging in this way, you create all kinds of potential for becoming a takeover target, because it’s not the smartest business decision in the end,” Antweiler said.

There may be good reasons for a company to split up assets, he said, such as when one asset or business is financially risky. That’s not the case with metallurgical coal, which is highly profitable.

“We’re not looking at the coal business as a risky business – in fact, it’s the opposite,” Antweiler said. “We’re still going to use metallurgical coal for decades because the demand for steel is not pivoting to alternative technologies quite yet.”

Antweiler suggested Teck’s senior management and directors appear to have been swayed by consultants pushing an ESG premium story that may not be living up to its billing. He pointed to recent studies that suggest the ESG premiums companies have been promised have yet to materialize.

In the Journal of International Financial Markets, Institutions and Money, for example, Di Luo from the University of Southampton Business School examined U.K. stocks and found “firms with lower ESG earn higher returns than those with higher ESG.” In the Journal of Empirical Finance, a study led by Rocco Ciciretti of the University of Rome likewise found that “firms that score high on ... ESG indicators exhibit lower expected returns.”

“The whole ESG notion is a bit of a muddled affair,” Antweiler said. “There seems to be this urgency that’s being articulated by the consultancy firms that say, if you don’t do this tomorrow, you’re going to be losing out on all these opportunities. I’m not sure this belief is really fully supported by the data.”

Teck cancelled a vote on its proposed separation plan when it became apparent some shareholders didn’t like a transition capital structure scheme that would see the base metals business profit from the coal mining business.

But Teck CEO Price made it clear that the company still intends to move forward with plans to separate its coal and base metals businesses, saying the company still thinks it’s “the best path to unlock the full value of Teck for shareholders.” It just plans to take a more “direct approach” to separation.

That could make it even more vulnerable to a takeover, Antweiler warned.

“If Teck comes back and offers, ‘We’re going to do a clean split,’ that’s going to actually jeopardize their core copper business,” Antweiler warned. “Then they really become a takeover target.

“My sense is there’s really no clean way forward, other than we’re going to do what we have been doing in the past, which is continue doing Teck, as-is, and move away from this de-merger business, which I don’t think actually creates any value.”

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