From Mining Superpower to Branch-Plant Economy
Government's "win" in keeping Teck's head office in Vancouver after Anglo-American takeover is meaningless optics that contradict sovereignty push, says Bay Street veteran
Last month, the federal government approved the takeover of Vancouver-based Teck Resources – one of Canada’s largest mining concerns – by British multinational giant Anglo American while reassuring everyone that the company would remain essentially Canadian.
Industry Minister Melanie Joly painted the $53 billion acquisition as a “significant win” for Canada because the government got Anglo to agree to several legally binding concessions, including the securing of 4,000 Canadian jobs and the spending of $4.5 billion in Canada over five years.
The key to the approval, however, was the company’s promise to headquarter the combined entity in Teck’s stomping grounds, rather than in London, England.
“Anglo Teck, with its global headquarters in Vancouver, will be a truly Canadian champion on the world stage,” she said.
One critic who isn’t buying it is Thomas Caldwell, chairman and chief executive of Caldwell Securities in Toronto. Caldwell, a respected veteran Bay Street investor, is very down on the deal because of what it means for Canada – and also on the government for trying to sell it as a victory.
Here’s our conservation, edited for clarity and length:
The government endorsed this deal largely on the grounds that the head office will apparently stay in Vancouver, but you don’t take much stock in that. Is that right?
My major issue is actually bigger than the head office. The head office thing is symptomatic. Canada is a mining superpower, [so] why is it that we’re always the takeover-ee versus the takeover-er? We have South Americans, we have Australians, we have South Africans controlling the Canadian mining industry.
I was in a meeting this morning and I said, ‘Canada could be a real destination for international capital, if we get it right, and remember: we’ve come off 10 years of basically anti-enterprise government,’ and someone said, ‘Well, what companies could you [invest in] in Canada?’
I said, ‘First off, stick to what we’re good at. Financial services and banks are a protected species, they do extremely well internationally. That’s one group. Our oil, our energy companies, the mid-caps right up to Suncor. Everything there is good.’
But it dawned on me as we talked that there were no major Canadian mining world-class enterprises left anymore. There’s a Barrick kind of thing, but there aren’t any in Canada, and that’s the thing I really bemoan more than anything else.
It’s not just government, although that’s a massive part of it, but it’s also management of Canadian companies. We think like branch-plant managers as opposed to aggressive titans building a mining industry.
So the head office of Teck – London versus Vancouver – is a little bit like dancing on the head of a pin. It’s like the head offices of the banks had to be in Montreal. Maybe they still are legally, but all the action is here in Toronto.
No matter what they say, the government gets a chance to do their posing, then reality sets in and the decision making goes where it makes more sense. Probably with Anglo, London is more sensible because of its time and location relative to their properties around the world.
Why didn’t the government just reject this deal, especially in light of all this talk about sovereignty?
I don’t know that they could. I don’t know the actual mechanics of it, but there’s a point at which you want to be hospitable to world capital. That’s what Prime Minister Carney’s running around the world for – ‘Hey, we’re open to our business, come on, you can buy whatever you want of this country.’
That’s sort of the sales pitch, which is unfortunate because I’m sure the major investors around the world are saying, ‘Okay, that’s great, why aren’t any of your big pensions investing in your own country? But you expect us to?’
It’s because we really don’t have the market for it. And I think this deal made sense economically and, from a business point of view, you might have had a changeover with the people, the family. They built a wonderful company there.
So there’s only so far government can go. They’ve approved every other major mining acquisition, so I don’t think it would be very good optics for them to [reject] it. But then they have to preserve the optics of giving lip service to Canada, which is of course what we’re famous for. That’s all this is about.
How much stock do you put into the government’s legally binding agreements with Anglo? They did the same thing with the Rogers-Shaw deal a few years ago and there are some who would say those agreements are already being ignored or forgotten. Is it fair to be skeptical?
I would think so. I think it’s fair to say, ‘Yeah, fine, that looks great, and it’s gonna play well in the papers for a couple of weeks.’
I’m an old thug trader. [Some] think of me as a nice old gentleman, but I’m not. I’m just a thug trader who got older, so let me try to put it this way. In my declining years, I also suffer from attention deficit disorder and all I know is any business dealings, legal papers, anything I’ve ever done – if it goes beyond four pages, someone’s getting taken advantage of. It always comes down to that – where is it in here, how are they getting me?
Agreements like that don’t mean anything. Politics is transitory, economics is permanent. It’s an immutable kind of thing. Eventually reality seeps through the cracks and decisions are made where decisions are made.
In any major company, the leaders, the guys who run the joint or gals that run the joint, there’s no more than four or five. You know, three to five people run every major company, every major bank. And then underneath them you’ve got the captains that expedite and make the things happen. And then underneath them you have the drones.
And basically the four or five guys at Anglo American, no matter what, they’re going to be in London. They might put one of those four or five in Vancouver because they like skiing or something, but it’s still going to be the same decision-making locus.
Do you see any remaining hurdles to clear on this?
I think it’s done and dusted. I would be quite surprised if anyone in government had the courage to block the deal at this point. If the Prime Minister’s office has opined that this is going to go ahead with these safeguards, the Competition Bureau isn’t going to stand in the way of that. They may add verbiage, but they’re not going to add anything substantive.
Why is this deal important beyond Bay Street and the mining industry? Why might the average Canadian want to care about this?
Increasingly, Canada is becoming a branch-plant economy. I once had a discussion with the dean of the Rotman School [of Business] about whether head offices were important. They are cosmically important.
I just got back from New York for a couple of days… I used to live there… and you have the highest concentration of universities, charities, money, head offices, and you won’t see one drill rig or one headframe there. Head offices are critically important to a country and to a city and that’s what they’re trying to preserve with optics, but it is just optics.
As I said, my biggest complaint is that this is a mining country. We should be the takeover-er, not the takeover-ee.
I used to work for one of those Canadian mining titans, Inco. I saw it first hand. A culture of mediocrity took over in management. Inco, under the then management of Scott Hand made a play for Falconbridge. At that time Xstrata, out of Switzerland, had acquired approximately 20% of the Falconbridge shares from Brascan, at a very low price for the time. In the deal though, if the price for the shares rose significantly before May of 2006, then Xstrata would have had to pony up the difference. The offer Inco made was months before then. Falconbridge had a nickel refinery in Norway. Rather than announce that this refinery would be sold, to satisfy any concerns by the EU, he just said in effect, if need be. Xstrata managed to get the EU to drag their heels. The date in May passed, thus giving Xstrata a huge advantage that they then used to out bid Inco. Thus, because Hand sat idly by rather than playing hardball, he lost the Falconbridge deal. But in doing so exposed Inco to the much more aggressive and hungry wolves around the world. Later that year the Brazilian company CVRD (now Vale) bought Inco.
The decade of 2000-2009 saw many of the Canadian mining giants taken over by foreign interests, or consolidation. Companies that disappeared during that period include, Noranda, Falconbridge, Inco, Cominco, Placer Dome, Alcan and Rio Algom. We as a country have never recovered. Primarily because of weak management. At the end of that decade the only two left standing were Teck and Barrick.
Around that time I found this indifferent attitude pervaded much of Canada. People were not interested in building a legacy. Instead, if the opportunity presented itself, they cashed out. What I describe as the "I won the lottery!" attitude.
Caldwell is spot on about the lack of follow-through. The House Industry committee has actually grilled officials on this exact topic. The problem is that the government relies on companies to self-report their compliance. They rarely conduct independent audits to see if the jobs actually stayed. It is essentially an honour system for multi-billion dollar corporations.