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Teck still planning for business separation despite cancellation of critical vote

Shareholders want a cleaner break than what Teck proposed
The Elkview coal mine: One of Teck Resources' four metallurgical coal mines in the East Kootenays the Vancouver-based miner had planned to hive off into a separate company

Teck Resources (TSX,NYSE:TECK.B) will proceed with a vote on phasing out its dual class structure, but has cancelled today's planned vote on a plan to separate into two companies.

In a first quarter earnings call just prior to today's annual and special shareholder's meeting today, Teck CEO Jonathan Price said the company still thinks separating into two separate companies is the best way to create value, but said it became clear that the way Teck planned to go about its division was not going to fly with shareholders.

Price told analysts there was strong support for a separation plan -- just not the one that Teck had cooked up for today's vote. That plan would hive off Teck's B.C. metallurgical coal mines into Elk Valley Resources, and base metals mines would be kept by Teck Metals.

It appears shareholders did not like one part of the strategy -- a Transition Capital Structure -- that would essentially see the new metals company subsidized with quarterly royalty and share redemption payments from the coal business, Elk Valley Resources.

Teck needed two-thirds of shareholders to approve the separation plan. Price said it had become clear that it wouldn’t get that majority, so that vote was called off.

“Our tracking showed that we weren’t going to achieve the sixty-six and two-thirds per cent threshold that we needed for approval,” Price said.

It appears that it wasn’t the separation plan per se that shareholders disliked, but the complicated way in which it would be done, including the Transition Capital Structure plan that would see some of the profits going from one company to another.

Teck will therefore go back to the drawing board and come up with another separation plan that is simpler and cleaner, Price said.

“We are confident from our discussion with shareholders that a substantial majority of shareholders support the strategy of separating Teck Metals from EVR," Price said. "At the same time, we’ve heard very clearly that some shareholders would prefer a more direct approach for that separation.

"Our goal will be to pursue a simpler and more direct separation which is the best path to unlock the full value of Teck for shareholders,."

Price said a vote on phasing out Teck's dual class share structure would go ahead.

"That vote will proceed," Price said.

Teck's plan to separate into two companies ended up chumming the waters and attracting one very big Swiss shark -- Glencore, which pitched a US$23 billion merger and demerger that would also have seen Teck's coal and base metals separated into two companies and combined with Glencore's.

Teck's board of directors have rejected Glencore's offer, and a number of Canadian politicians, business associations and Canadian mining luminaries have all spoken out against Glencore's takeover plan.

Price has said separating Teck into two separate companies would maximize value for shareholders, but has not explained how that will maximize value. After all, Teck’s steelmaking coal mines are the biggest money makers in Teck’s portfolio of mines. However, they are “coal” mines and some ESG-minded investors don’t want to invest in any mining company that is tainted with coal.

Asked if Teck has been approached by some other company other than Glencore to buy the coal mines, Price would not say.

“Suffice to say that the process we’ve been through over the last two months, which of course has been a very public one, has unearthed significant interest in both businesses – EVR and Teck Metals – and it’s very clear that the value of those businesses are well recognized.”

As for Glencore's bid to buy out Teck, today's decision not to go ahead with a vote for separation may actually serve to encourage Glencore.

Glencore had said its offer only worked if Teck did not separate first, as there would be too much unwinding of complicated business arrangements, including the Transition Capital Structure. Now that Teck is to remain a single entity, for now, it may be that Glencore will be back with a sweetened offer to shareholders.

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