Teck Resources Ltd. will separate its business into two independent, publicly-listed companies: Teck Metals Corp. and Elk Valley Resources Ltd. (EVR). The company said the separation will create two world-class resource companies with different commodity fundamentals and value propositions. Teck Metals will be positioned as a base metals mining company with a top-tier copper development portfolio. EVR will be a pure play Canadian metallurgical coal producer.
“This transformative transaction creates two strong, sustainable, world-class mining companies committed to responsibly providing essential resources the world needs,” said Jonathan Price, CEO, Teck. “Both have high-quality operating assets and strong financial foundations, with talented and dedicated employees, committed to ensuring safe and responsible operations. The transaction simplifies the portfolio of each company, allowing for strategic and financial focus and the ability to pursue tailored capital allocation strategies.”
The separation is structured as a spin-off of Teck’s steelmaking coal business by way of a distribution of EVR common shares to Teck shareholders. Teck Metals will retain a substantial interest in steelmaking coal cash flows through a transition period in the form of an 87.5% interest in a gross revenue royalty and preferred shares of EVR. Under this transition capital structure, Teck Metals will receive quarterly payments consisting of royalty payments that will in aggregate equal 90% of EVR’s free cash flow.
Teck shareholders will receive 0.1 common share of EVR for each Teck share and approximately $0.39 cash per share for an aggregate of $200 million in cash. The royalty is a 60% gross revenue royalty that will be paid quarterly from EVR’s met coal revenue, subject to free cash flow and minimum cash balance limitations designed to support the financial resiliency of EVR. The royalty will be payable until the later of (a) an aggregate amount of $7 billion in royalty payments having been made, or December 31, 2028. Assuming a $185 per metric ton price for EVR’s product and a CAD/USD exchange rate of 1.30, the transition capital structure could be fully paid in approximately 11 years.
Teck said EVR will be well-capitalized with $1 billion in cash and other working capital, no debt, and $88 million in leases relating to operations. EVR will have credit facilities in place to meet its existing reclamation bonding requirements. Additionally, EVR will establish an Environmental Stewardship Trust and fund it through escalating fixed annual contributions, starting at $50 million, for long-term environmental obligations.
In related news, Teck said it has also reached agreement with its Nippon Steel Corp. and POSCO to exchange their minority interests in the Elkview and Greenhills operations for interests in EVR. As a result, EVR will own 100% of its steelmaking coal operations. NSC’s exchange of its Elkview interest and its $1.025 billion cash investment will give it a 10% interest in EVR. POSCO will receive a 2.5% interest in EVR.
Teck will seek shareholder approval of the Separation at its annual and special meeting of shareholders expected to be held on or about April 26, 2023. In addition to Teck shareholder and court approvals, the separation is subject to customary conditions. Teck expects that the transaction will be completed in the second quarter of 2023.